New rules for the new economy : 10 radical strategies for a connected world

New Rules for the New
Economy

N KELLY

viking

Published by the Penguin Group
Penguin Putnam Inc., 375 Hudson Street,
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First published in 1998 by Viking Penguin,
a member of Penguin Putnam Inc.

10 987654321

Copyright © Kevin Kelly, 1998
All rights reserved

A portion of this work first appeared in Wired, September 1 997,
as "New Rules for the New Economy: Twelve Dependable
Principles for Thriving in a Turbulent World."

Library of Congress Cataloging-in-Publication Data
Kelly, Kevin.

New rules for the new economy : 10 radical strategies for
a connected world / Kevin Kelly,
p. cm.

Includes bibliographical references and index.
ISBN 0-670-88111-2

1. Economic forecasting. 2. Business forecasting. I. Title
HC59 15^45 1998
658 — dc2i 98-36917

This book is printed on acid-free paper.

Printed in the United States of America
Set in Electra

Designed by Francesca Belanger

Without limiting the rights under copyright reserved above,
no part of this publication may be reproduced, stored in or
introduced into a retrieval system, or transmitted, in any form
or by any means (electronic, mechanical, photocopying, recording,
or otherwise), without the prior written permission of both the
copyright owner and the above publisher of this book.

For Gia-Miin

CONTENTS

This New Economy i

1 Embrace the Swarm 9

2 Increasing Returns 23
Plentitude, Not Scarcity 39

4 Follow the Free 50

5 Feed the Web First 65
Let Go at the Top 83

7 From Places to Spaces 94

No Harmony, All Flux 108

Relationship Tech 118

"IO Opportunities Before Efficiencies 140

A Thousand Points of Wealth 156

New Rules for the New Economy 161

ACKNOWLEDGMENTS 163

NOTES 165

ANNOTATED BIBLIOGRAPHY 167

INDEX 173

New Rules for the New
Economy

This New Economy

No one can escape the transforming fire of machines. Technology, which
once progressed at the periphery of culture, now engulfs our minds as
well as our lives. Is it any wonder that technology triggers such intense
fascination, fear, and rage?

One by one, each of the things that we care about in life is touched
by science and then altered. Human expression, thought, communica-
tion, and even human life have been infiltrated by high technology. As
each realm is overtaken by complex techniques, the usual order is in-
verted, and new rules established. The mighty tumble, the once confi-
dent are left desperate for guidance, and the nimble are given a chance
to prevail.

But while the fast-forward technological revolution gets all the head-
lines these days, something much larger is slowly turning beneath it.
Steadily driving the gyrating cycles of cool technogadgets and gotta-
haves is an emerging new economic order. The geography of wealth is
being reshaped by our tools. We now live in a new economy created by
shrinking computers and expanding communications.

This new economy represents a tectonic upheaval in our common-
wealth, a far more turbulent reordering than mere digital hardware has
produced. The new economic order has its own distinct opportunities
and pitfalls. If past economic transformations are any guide, those who
play by the new rules will prosper, while those who ignore them will
not. We have seen only the beginnings of the anxiety, loss, excitement,
and gains that many people will experience as our world shifts to a new
highly technical planetary economy.

2 / New Rules for the New Economy

This new economy has three distinguishing characteristics: It is
global. It favors intangible things — ideas, information, and relation-
ships. And it is intensely interlinked. These three attributes produce a
new type of marketplace and society, one that is rooted in ubiquitous
electronic networks.

Networks have existed in every economy. What's different now is
that networks, enhanced and multiplied by technology, penetrate our
lives so deeply that "network" has become the central metaphor around
which our thinking and our economy are organized. Unless we can un-
derstand the distinctive logic of networks, we can't profit from the eco-
nomic transformation now underway.

New Rules for the New Economy lays out ten essential dynamics of
this emerging financial order. These rules are fundamental principles
that are hardwired into this new territory, and that apply to all busi-
nesses and industries, not just high-tech ones. Think of the principles
outlined in this book as rules of thumb.

Like any rules of thumb they aren't infallible. Instead, they act as
beacons charting out general directions. They are designed to illumi-
nate deep-rooted forces that will persist into the first half of the next
century. These ten laws attempt to capture the underlying principles
that shape our new economic environment, rather than chase current
short-term business trends.

The key premise of this book is that the principles governing the
world of the soft — the world of intangibles, of media, of software, and
of services — will soon command the world of the hard — the world of
reality, of atoms, of objects, of steel and oil, and the hard work done
by the sweat of brows. Iron and lumber will obey the laws of software,
automobiles will follow the rules of networks, smokestacks will comply
with the decrees of knowledge. If you want to envision where the future
of your industry will be, imagine it as a business built entirely around
the soft, even if at this point you see it based in the hard.

Of course, all the mouse clicks in the world can't move atoms in
real space without tapping real energy, so there are limits to how far the
soft will infiltrate the hard. But the evidence everywhere indicates that
the hard world is irreversibly softening. Therefore one can gain a huge
advantage simply by riding this conversion. To stay ahead, you chiefly
need to understand how the soft world works — how networks pros-

This New Economy / 3

per and grow, how interfaces control attention, how plentitude drives
value — and then apply those principles to the hard world of now.

The tricks of the intangible trade will become the tricks of your
trade.

The new economy deals in wispy entities such as information, rela-
tionships, copyright, entertainment, securities, and derivatives. The U.S.
economy is already demassifying, drifting toward these intangibles. The
creations most in demand from the United States (those exported) lost
50% of their physical weight per dollar of value in only six years. The
disembodied world of computers, entertainment, and telecommuni-
cations is now an industry larger than any of the old giants of yore,
such as construction, food products, or automobile manufacturing. This
new information-based sector already occupies 15% of the total U.S.
economy.

Yet digital bits, stock options, copyright, and brands have no mea-
surable economic shape. What is the unit of software: Floppy disks?
Lines of code? Number of programs? Number of features? Economists
are baffled. Walter Wriston, former chairman of Citicorp, likes to grum-
ble that federal economists can tell us exactly how many left-handed
cowboys are employed each year, yet have no idea how many software
programs are in use. The dials on our economic dashboard have started
spinning wildly, blinking and twittering as we head into new territory.
It's possible the gauges are all broken, but it is much more likely the
world is turning upside down.

RememberGM? In the 1950s business reporters were infatuated with
General Motors. GM was the paragon of industrial progress. It not only
made cars, it made America. GM was the richest company on earth. To
many intelligent observers, GM was the future of business in general. It
was huge, and bigger was better. It was stable and paternal, providing
lifetime employment. It controlled all parts of its vast empire, ensur-
ing quality and high profits. GM was the best, and when the pundits
looked ahead 40 years they imagined all successful companies would be
likeGM.

How ironic that ever since the future has arrived, GM is now the
counter example. Today, if your company is like GM, it's in deep trou-

4 / New Rules for the New Economy

ble. Instead, pundits point to Microsoft. Microsoft is the role model.
It is the highest-valued company on Earth. It produces intangibles. It
rides the logic of standards. Its sky-high stock valuation reflects the new
productivity. So we look ahead and say: In 40 years all companies will
be like Microsoft.

History would suggest this is a bad bet. The obvious lesson is that we
tend to project the future from what's fashionable at present. Right now
software and entertainment companies are very profitable, so we assume
they are role models. Brad DeLong, an economist at UC Berkeley, has
a handy theory of economic history. He says that various sectors of
economy wax and wane in prominence like movie stars. The history
of the American economy can be seen as a parade of "heroic" indus-
tries that first appear on the scene as unknowns, then heroically "save"
the economy by doing economic miracles, and for a time are treated
as economic stars. In the 1900s, the automobile industry was heroic:
There was incredible innovation, many, many car company upstarts, in-
credible productivity. It was a wild and exciting time. But then the hero-
ism died away and the auto industry became big, monolithic, boring,
and hugely profitable. In DeLong's view, the latest heroic savior is the
information, communication, and entertainment complex. Businesses
in the realm of software and communications are now valorous: They
pull successes out of a hat, stack up unending innovation, and perform
economic miracles. Long live computers!

There is a lot of common sense to DeLong's view of heroic industry.
Just because Microsoft is heroic now, doesn't mean all companies will
follow their lead and replicate intellectual property on floppy disks with
a profit margin of 90%. No doubt many, many companies in the future
will not resemble Microsoft at all. Somebody has to fix the plugged toi-
lets of the world, somebody has to build houses, somebody has to drive
the trucks hauling our milk.

Even Wired magazine, mouthpiece of the digital revolution — where I
serve as one of the editors — does not approach the ideal of an intangi-
ble company. Wired is located smack in the middle of an old-fashioned
downtown city, and in one year turns 8 million pounds (or 48 railway
cars) of dried tree pulp, and 330,000 pounds of bright colored ink into
hard copies of the magazine. A lot of atoms are involved.

So how can we make the claim that all businesses in the world

This New Economy / 5

will be reshaped by advances in chips and glass fibers and spectrum?
What makes this particular technological advance so special? Why is
the business hero of this moment so much more important than its
recent predecessors?

Because communication — which in the end is what the digital tech-
nology and media are all about — is not just a sector of the economy.
Communication is the economy.

This vanguard is not about computers. Computers are over. Most of
the consequences that we can expect from computers as stand-alone
machines have already happened. They have sped up our lives, and
made managing words, numbers, and pixels quite extraordinary, but
they have not had much more effect beyond that.

The new economy is about communication, deep and wide. All the
transformations suggested in this book stem from the fundamental way
we are revolutionizing communications. Communication is the founda-
tion of society, of our culture, of our humanity, of our own individual
identity, and of all economic systems. This is why networks are such a
big deal. Communication is so close to culture and society itself that
the effects of technologizing it are beyond the scale of a mere indus-
trial-sector cycle. Communication, and its ally computers, is a special
case in economic history. Not because it happens to be the fashionable
leading business sector of our day, but because its cultural, technologi-
cal, and conceptual impacts reverberate at the root of our lives.

Certain technologies (such as the integrated circuit chip) spur in-
novation and novelty in other technologies; these catalysts are called
"enabling technologies." Occasionally an economic sector will lever-
age power and accelerate the advance of other sectors in an economy.
These can be thought of as "enabling sectors." Computer chips and
communication networks have produced a sector of an economy that is
transforming all the other sectors.

Only a relatively small number of people have ever been directly
employed in the world of finance. Yet ever since the days of the Vene-
tian bankers, financial innovations such as mortgages, insurance, ven-
ture funding, stocks, checks, credit cards, mutual funds, to name only
a few, have completely reshaped our economy. They have enabled the

6 / New Rules for the New Economy

rise of corporations, of market capitalism, of the industrial age, and
much more. Unlike many previous heroic industries such as the electri-
cal power industry or the chemical industry, this small sector has influ-
enced how all business is done, and how we structure our lives.

As tremendous as the influence of financial inventions have been,
the influence of network inventions will be as great, or greater.

It took several billion years on Earth for unicellular life to evolve.
And it took another billion years or so for that single-celled life to evolve
multicellular arrangements — each cell touching a few cells near it to
make a living spherical organism. At first, the sphere was the only form
multicellular life could take because its cells had to be near one an-
other to coordinate their functions. After another billion years, life even-
tually evolved the first cellular neuron — a thin strand of tissue — which
enabled two cells to communicate over a distance. With that single
enabling innovation, the variety of life boomed. With neurons, life no
longer had to remain bounded in a blob. It was possible to arrange cells
into almost any shape, size, and function. Butterflies, orchids, and kan-
garoos all became possible. Life quickly exploded in a million different
unexpected ways, into fantastic awesome varieties, until wonderful life
was everywhere.

Silicon chips linked into high-bandwidth channels are the neurons
of our culture. Until this moment, our economy has been in the
multicellular stage. Our industrial age has required each customer or
company to almost physically touch one another. Our firms and or-
ganizations resemble blobs. Now, by the enabling invention of silicon
and glass neurons, a million new forms are possible. Boom! An infinite
variety of new shapes and sizes of social organizations are suddenly
possible. Unimaginable forms of commerce can now coalesce in this
new economy. We are about to witness an explosion of entities built on
relationships and technology that will rival the early days of life on Earth
in their variety.

In the future very few companies will look like Microsoft, or even
Wired. Even ancient forms will be bent. Farming, and trucking, plumb-
ing, and other traditional occupations will continue, just as unicellular
life continues. But the economics of farmers and friends, in their own

This New Economy / 7

way, will obey the logic of networks, just as Microsoft does now.

We see evidence for that already. A farmer in America — the hero of
the agricultural economy — rides in a portable office on his tractor. It's
air conditioned, has a phone, a satellite-driven GPS location device,
and sophisticated sensors near the ground. At home his computer is
connected to the never-ending stream of weather data, the worldwide
grain markets, his bank, moisture detectors in the soil, digitized maps,
and his own spreadsheets of cash flow. Yes, he gets dirt under his fin-
gernails, but his manual labor takes place in the context of a network
economy.

Much the same can be said about truck drivers. While the experi-
ence of sitting behind a wheel remains unchanged, the new tools of
trucking — barcodes, radios, dispatch algorithms, route hubs, and even
roads themselves — all follow the logic of networks. Thus, the very sweat
of truckers as they manually load and unload heavy boxes becomes in-
corporated into the network economy.

Our economy is an amalgamation of diverse styles of trade, com-
merce, and social exchanges. New economic functions develop around
the operating old. Barter, one of the earliest forms of commerce, has
not gone away. The barter economy ran through the agricultural age, the
industrial age, and continues today. Indeed most of what happens on
the World Wide Web is barter. Even many years from now a significant
portion of what the economy does will be done by the industrial lay-
ers — machines churning out goods and moving materials. The old
economies will continue to operate profitably within the deep cortex of
the new economy.

Yet the inertia of the industrial age continues to mesmerize us. Be-
tween 1990 and 1996 the number of people making tangible things —
stuff you can drop on your toe — decreased by 1%, while the number
of people employed in providing "services" (intangibles) grew 15%.
Presently a mere 18% of U.S. employment is in manufacturing. But
three quarters of those 18% actually perform network economy jobs
while working for a manufacturing company. Instead of pushing atoms
they push bits around: accountants, researchers, designers, market-
ing, sales, lawyers, and all the rest who sit at a desk. Only a minus-
cule percentage of the workforce performs industrial age tasks, yet our
politics, our media, our funding, and our education continue the grand

8 / New Rules for the New Economy

fantasy that industrial jobs need to be created. Within a generation,
two at the most, the number of people working in honest-to-goodness
manufacturing jobs will be no more than the number of farmers in the
land — less than a few percent. Far more than we realize it, the network
economy is pulling in everyone.

As the world of chips and glass fibers and wireless waves goes, so
goes the rest of the world.

In the face of history this bold assertion may seem naive. But every
once in a while something big and new does happen. It must have felt
that way to the home-craft Luddites who sensed that the industrial age
was not just about newfangled looms, but foreshadowed deep, systemic
changes with life-changing ramifications. Were they naive to think that
machines would ultimately transform the ancient and holy act of plant-
ing seeds and harvesting the grain? Of breeding cows? Of the structure
of communities?

"Listen to the technology," advises Carver Mead, one of the inven-
tors of the modern computer chip. "Find out what it is telling you."
Following that lead, I have assembled these rules of thumb by asking
these questions: How do our tools shape our destiny? What kind of an
economy is our new technology suggesting?

Steel ingots and rivers of oil, smokestacks and factory lines, and
even tiny seeds and cud-chewing cows are all becoming enmeshed in
the world of smart chips and fast bandwidth, and sooner or later they
will begin to fully obey the new rules of the new economy, as everything
will. I've listened to the technology, and as best as I can determine, the
technology repeats ten distinct refrains, as premiered in the following
ten chapters.

1 EMBRACE THE SWARM
The Power of Decentralization

The atom is the icon of the 20th century. The atom whirls alone. It is
the metaphor for individuality. But the atom is the past. The symbol
for the next century is the net. The net has no center, no orbits, no cer-
tainty. It is an indefinite web of causes. The net is the archetype dis-
played to represent all circuits, all intelligence, all interdependence, all
things economic, social, or ecological, all communications, all democ-
racy, all families, all large systems, almost all that we find interesting
and important. Whereas the atom represents clean simplicity, the net
channels messy complexity.

The net is our future.

Of all the endeavors we humans are now engaged in, perhaps the
grandest of them all is the steady weaving together of our lives, minds,
and artifacts into a global scale network. This great work has been go-
ing on for decades, but recently our ability to connect has accelerated.
Two brand-new technological achievements — the silicon chip and the
silicate glass fiber — have rammed together with incredible speed. Like
nuclear particles crashing together in a cyclotron, the intersection of
these two innovations has unleashed a never-before-seen force: the
power of a pervasive net. As this grand net spreads, an animated swarm
is reticulating the surface of the planet. We are clothing the globe with
a network society.

The dynamic of our society, and particularly our new economy,

io / New Rules for the New Economy

will increasingly obey the logic of networks. Understanding how
networks work will be the key to understanding how the economy
works.

Any network has two ingredients: nodes and connections. In the
grand network we are now assembling, the size of the nodes is col-
lapsing while the quantity and quality of the connections are exploding.
These two physical realms, the collapsing microcosm of silicon and the
exploding telecosm of connections, form the matrix through which the
new economy of ideas flows.

A single silicon transistor today can only be seen in a microscope.
In a few years it will take a microscope to see an entire chip of transis-
tors. As the size of silicon chips shrinks to the microscopic, their costs
shrink to the microscopic as well. In 1950 a transistor cost five dollars.
Today it costs one hundredth of a cent. In 2003 one transistor will cost
a microscopic nanocent. A chip with a billion transistors will eventually
cost only a few cents.

What this means is that chips are becoming cheap and tiny enough
to slip into every object we make. Eventually, every can of soup will have
a chip on its lid. Every light switch will contain a chip. Every book will
have a chip embedded in its spine. Every shirt will have at least one chip
sewn into its hem. Every item on a grocery shelf will have stuck to it, or
embedded within itself, a button of silicon. There are 10 trillion objects
manufactured in the world each year and the day will come when each
one of them will carry a flake of silicon.

This is not crazy, nor distant. Ten years ago the notion that all doors
in a building should contain a computer chip seemed ludicrous, but
now there is hardly a hotel door in the U.S. without a blinking, beeping
chip in its lock. These microscopic chips will be so cheap we'll throw
them away. Thin slices of plastic known as smart cards now hold a
throwaway chip smart enough to be your banker. If National Semicon-
ductor gets its way, soon every FedEx package will be stamped with a
disposable silicon flake that smartly tracks the contents of the package
on its journey. And if an ephemeral envelope can have a chip, so can
your chair, each bag of candy, a new coat, a basketball. Soon, all manu-
factured objects, from sneakers to drill presses to lamp shades to cans
of soda, will contain a tiny sliver of embedded thought.

Embrace the Swarm / n

And why not?

Today the world is populated by 200 million computers. Andy Grove
of Intel happily estimates that we'll see 500 million computers by 2002.
Yet for every expensive chip put into a beige computer box, there are
now 30 other cheap processors put into everyday things. The number
of noncomputer chips already pulsating in the world is 6 billion — one
chip for every human on Earth.

We are moving from crunching
to connecting. While the
number of computer chips is
rising, the number of chips in
objects other than computers is
rising faster.

Chips in Objects Chips

You already have a non-PC chip embedded in your car and stereo
and rice cooker and phone. These chips are dumb chips, with limited
ambitions. A chip in your car's brakes doesn't have to do floating-point
math, spreadsheets, or video processing; it only needs to brake like a
bulldog.

Because they have limited functions and can be produced in great
quantity, these dumb chips are ultracheap to make. One industry ob-
server calculated that an embedded processor chip costs less to manu-
facture than a ball bearing. Since they can be stamped out as fast and
cheap as candy gumdrops, these chips are known in the trade as "jelly
beans." Dumb, cheap jelly bean chips are invading the world far faster
than PCs did.

This is not surprising. You can only use one or two personal com-
puters at a time, but the number of other objects in your life is almost
unlimited. First, we'll put jelly bean chips into high-tech appliances,
then later into all tools, and then eventually into all objects. If current
rates continue there'll be some 10 billion tiny grains of silicon chips
embedded into our environment by 2005.

Putting a dot of intelligence into every object we make at first gives

12 / New Rules for the New Economy

us a billion dimwitted artifacts. But we are also, at the same time,
connecting these billion nodes, one by one.

We are connecting everything to everything.

There is something mysterious that happens when we take large
numbers of things that are fairly limited and connect them all together.
When we take the dumb chip in each cash register in a store and link
them into a swarm, we have something more than dumb. We have real-
time buying patterns that can manage inventory. If we take the dumb
chips that already regulate the guts of an automobile engine, and let
them communicate an engine's performance to the mechanic of a
trucking firm, those dumb chips can smartly cut expensive road repairs.
(Mercedes Benz recently announced it is planning to embed a web
server into its top-of-the-line model cars so technicians can spot service
problems remotely.) When connected into a swarm, small thoughts be-
come smart.

When we permit any object to transmit a small amount of data and
to receive input from its neighborhood, we change an inert object into
an animated node.

It is not necessary that each connected object transmit much data.
A tiny chip plastered inside a water tank on an Australian ranch trans-
mits only the telegraphic 2-bit message of whether the tank is FULL or
NOT. A chip attached to the ear of each steer on the same ranch beams
out his location in GPS numbers; nothing more. "I'm here, I'm here" it
tells the rancher's log book; nothing more. The chip in the gate at the
end of the rancher's road communicates only a single word, reporting
when it was last opened: "Tuesday."

It does not take sophisticated infrastructure to transmit these dumb
bits. Stationary objects — parts of a building, tools on the factory floor,
fixed cameras — are wired together. The nonstationary rest — that is,
most manufactured objects — are linked by infrared and radio, creating
a wireless web vastly larger than the wired web. The same everyday fre-
quencies that run garage door openers and TV remote controls will be
multiplied by the millions to carry the dumb messages of connected

Embrace the Swarm / 13

objects.

The glory of these connected crumbs is that they don't need to be
individually sophisticated. They don't need speech recognition, artificial
intelligence, or fancy expert systems. Instead, the network economy re-
lies on the dumb power of bits linked together into a swarm.

Our brains tap into dumb power by clumping dumb neurons into
consciousness. The internet banks on dumb power by connecting
dumb personal computers. A personal computer is like a single brain
neuron in a plastic box. When linked by the telecosm into a neural net-
work, these dumb PC nodes create that fabulous intelligence called the
World Wide Web.

Again and again we see the same dynamic at work in other domains:
Dumb cells in our body work together in a swarm to produce an incred-
ibly smart immune system, a system so sophisticated we still do not
fully comprehend it.

Dumb parts, properly connected into a swarm, yield smart results.

A trillion dumb chips connected into a hive mind is the hardware.
The software that runs through it is the network economy. A planet
covered with hyperlinked chips is shrouded with waves of sensibility.
Millions of moisture sensors in the fields of farmers shoot up data,
hundreds of weather satellites beam down digitized images, thousands
of cash registers spit out bit streams, myriad hospital bedside monitors
trickle out signals, millions of web sites tally attention, and tens of mil-
lions of vehicles transmit their location code; all of this swirls into the
web. That matrix of signals is the net.

The net is not just humans typing at one another on AOL, although
that is a part of it and will be as long as seduction and flaming are
enjoyable. Rather, the net is the total collective interaction of a trillion
objects and living beings, linked together through air and glass.

This is the net that begets the network economy. According to MCI,
data traffic on the global phone system will soon overtake voice traf-
fic. The current total volume of voice traffic is 1,000 times that of data,
but in three years that ratio will flip. ElectronicCast estimates data traf-
fic — the talk of machines — will be ten times voice traffic by 2005. That
means that by 2001 most of the signals zipping around the Earth will

14 / New Rules for the New Economy

be machines talking to machines — file transfers, data streams, and the
like. The network economy is already expanding to include new partici-
pants: agents, bots, objects, and servers, as well as several billion more
humans. We won't wait for Al to make intelligent systems; we'll do it
with the swarm power of ubiquitous computing and pervasive connec-
tions.

The surest way to smartness is through massive dumbness.

The surest way to advance massive connectionism is to exploit de-
centralized forces — to link the distributed bottom. How do you build a
better bridge? Let the parts talk to one another. How do you improve
lettuce farming? Let the soil speak to the farmer's tractors. How do you
make aircraft safe? Let the airplanes communicate among themselves
and pick their own flight paths. This decentralized approach, known as
"free flight," is a system the FAA is now trying to institute to increase
safety and reduce air-traffic bottlenecks at airports.

Mathematical problems which were once intractable for super-
computers have been solved by using a swarm of small PCs. A very
complex problem is broken up into tiny parts and distributed through-
out the network. Likewise, vast research projects that would tax any one
institution can be distributed to an ad hoc network. The Tree of Life is a
worldwide taxonomic catalog of all living species on Earth administered
on the web. Such a project is beyond the capabilities of one person or
group. But a decentralized network can produce the necessary intelli-
gence. Each local expert supplies their own data (on finches, or ferns or
jellyfish) to fill in some of the blanks. As Larry Keely of the Doblin Group
says, "No one is as smart as everyone."

Any process, even the bulkiest, most physical process, can be tack-
led by bottom-up swarm thinking. Take, for example, the delivery of wet
cement in the less-than-digital economy of rural northern Mexico. Here
Cemex (Cementos Mexicanos) runs a ready-mix cement business that
is overwhelming its competitors and attracting worldwide interest. It
used to be that getting a load of cement delivered on time to a con-
struction site in the Guadalajara region was close to a miracle. Traffic
delays, poor roads, contractors who weren't ready when they said they
would be, all added up to an on-time delivery rate of less than 35%.

Embrace the Swarm / 15

In response, cement companies tried to enforce rigid advance reserva-
tions, which, when things went wrong (as they always did), only made
matters worse ("Sorry, we can't reschedule you until next week.").

Cemex transformed the cement business by promising to deliver
concrete faster than pizza. Using extensive networking technology —
GPS real-time location signals from every truck, massive telecommu-
nications throughout the company, and full information available to
drivers and dispatchers, with the authority to act on it — the company
was able to promise that if your load was more than 10 minutes late,
you got a 20% discount.

Instead of rigidly trying to schedule everything ahead of time in an
environment of chaos, Cemex let the drivers themselves schedule deliv-
eries ad hoc and in real time. The drivers formed a flock of trucks criss-
crossing the town. If a contractor called in an order for 12 yards of mix,
the available truck closest to the site at that time would make the de-
livery. Dispatchers would ensure customer creditworthiness and guard
against omissions, but the agents in the field had permission and the
information they needed to schedule orders on the fly. Result: On-time
delivery rates reached about 98%, with less wastage of hardened ce-
ment, and much happier customers.

Similar thinking has been used in a GM paint plant in Fort Wayne,
Indiana. The wonderful choice of colors that customers now enjoy on
new vehicles was playing havoc on the paint line. When one car after
another is sprayed black, everything is easy. But when one car is red and
the next white, the painting process is slowed down as painting equip-
ment is cleansed of one color to make it ready for the next. (The clean-
out procedure also wastes paint left in the paint lines.) Why not gang
up all the white cars and do them together? Because ganging up slows
the line. A car has to be built and completed as it is ordered, as quickly
as possible. The solution embraces the swarm.

In the paint factory each robot painter (basically a dimwitted paint-
ing arm) is empowered to bid on a paint job. If it is currently painting
red and a car slated to be red is coming down the assembly line, it says,
"Let me do it," and it beckons the car to its paint station. The robots
schedule their own work. They have very tiny brainlets, connected to
a server. No central brain coordinates; the schedule comes from the
swarm of mini-brains. The result: GM saves $1.5 million a year. The

16 / New Rules for the New Economy

equipment requires less paint (due to less cleaning between cars), and
keeps the line moving faster.

Railways are now employing swarm technology. Centralized traffic
control doesn't work when the traffic becomes very complex and time
cycles are shortened. The Japanese use a bottom-up swarm model to
schedule their famous bullet express trains, which boast incredible
punctuality. Switching is done locally and autonomously as if the trains
were a swarm with one mind. Railway owners in Houston are hoping to
get a swarm model running for their rail yards. With their current cen-
trally controlled system, the switching yards are so clogged that there
is a permanent train of freight cars circling the greater Houston area as
a buffer. It's like a mobile parking lot. When there's an opening in the
yard, cars are pulled out of the holding pattern train. But with a system
based on the swarm model, local lines can autonomously switch them-
selves, using minimal intelligence onboard. Such a self-regulating and
self-optimizing system would reduce delays.

That's how the internet handles its amazing loads of traffic. Every
email message is broken into bits, with each bit addressed in an en-
velope, and then all the fragmentary envelopes are sent into a global
web of pathways. Each envelope seeks the quickest route it can find
instant by instant. The email message becomes a swarm of bits that are
reassembled at the other end into a unified message. If the message is
re-sent to the same destination, the second time it may go by a wholly
different route. Often the paths are inefficient. Your email may go to
Timbuktu and back on its way across town. A centralized switching sys-
tem would never direct messages in such a wasteful manner. But the
inefficiencies of individual parts is overcome by the incredible reliability
of the system as a whole.

The internet model has many lessons for the new economy but per-
haps the most important is its embrace of dumb swarm power. The aim
of swarm power is superior performance in a turbulent environment.
When things happen fast and furious, they tend to route around cen-
tral control. By interlinking many simple parts into a loose confed-
eration, control devolves from the center to the lowest or outermost
points, which collectively keep things on course.

A successful system, though, requires more than simply relinquish-
ing control completely to the networked mob.

Embrace the Swarm / 17

Complete surrender to the bottom is not what embracing swarm is
about.

Let me retell a story that I told in Out of Control, a book that details
the advantages, disadvantages, quirks, and consequences of complex
systems governed by swarmlike processes. This story illustrates the
power of a swarm, but it has a new ending, which shows how dumb
power is not always enough.

In 1990 about 5,000 attendees at a computer graphics conference
were asked to operate a computer flight simulator devised by Loren
Carpenter. Each participant was connected into a network via a virtual
joy stick. Each of the 5,000 copilots could move the plane's up/down,
left/right controls as they saw fit, but the equipment was rigged so
that the jet responded to the average decisions of the swarm of 5,000
participants. The flight took place in a large auditorium, so there was
lateral communication (shouting) among the 5,000 copilots as they
attempted to steer the plane. Remarkably, 5,000 novices were able to
land a jet with almost no direction or coordination from above. One
came away, as I did, convinced of the remarkable power of distributed,
decentralized, autonomous, dumb control.

About five years after the first show (this is the update), Carpenter
returned to the same conference with an improved set of simulations,
better audience input controls, and greater expectations. This time, in-
stead of flying a jet, the challenge was to steer a submarine through a
3D undersea world to capture some sea monster eggs. The same audi-
ence now had more choices, more dimensions, and more controls. The
sub could go up/down, forward/back, open claws, close claws, and so
on, with far more liberty than the jet had. When the audience first took
command of the submarine, nothing happened. Audience members
wiggled this control and that, shouted and counter-shouted instruc-
tions to one another, but nothing moved. Each person's instructions
were being canceled by another person's orders. There was no cohesion.
The sub didn't budge.

Finally Loren Carpenter's voice boomed from a loudspeaker in the
back of the room. "Why don't you guys go to the right?" he hollered.
Click! Instantly the sub zipped of to the right. With emergent coordina-
tion the audience adjusted the details of sailing and smoothly set off in

18 / New Rules for the New Economy

search of sea monster eggs.

Loren Carpenter's voice was the voice of leadership. His short mes-
sage carried only a few bits of information, but that tiniest speck of top-
down control was enough to unleash the swarm below. He didn't steer
the sub. The audience of 5,000 novice cocaptains did that very compli-
cated maneuvering, magically and mysteriously. All Loren did was un-
lock the swarm's paralysis with a vision of where to aim. The swarm
again figured out how to get there in the same marvelous way that they
had figured out how to land the jet five years earlier.

Without some element of governance from the top, bottom-up con-
trol will freeze when options are many. Without some element of leader-
ship, the many at the bottom will be paralyzed with choices.

Numerous small things connected together into a network generate
tremendous power. But this swarm power will need some kind of mini-
mal governance from the top to maximize its usefulness. Appropriate
oversight depends on the network. In a firm, leadership is supervision;
in social networks, government; in technical networks, standards and
codes.

We have spent centuries obsessed with the role of top-down gov-
ernance. Its importance remains. But the great excitement of the new
economy is that we have only now begun to explore the power of the
bottom, where peers holds sway. It is a vast mother lode waiting to be
tapped. With the invention of a few distributed systems, such as the in-
ternet, we have merely probed the potential of what minimally central-
ized networks can do.

At present, there is far more to be gained by pushing the boundar-
ies of what can be done by the bottom than by focusing on what can be
done at the top.

When it comes to control, there is plenty of room at the bottom.
What we are discovering is that peer-based networks with millions of
parts, minimal oversight, and maximum connection among them can
do far more than anyone ever expected. We don't yet know what the
limits of decentralization are.

Embrace the Swarm / lg

The great benefits reaped by the new economy in the coming dec-
ades will be due in large part to exploring and exploiting the power of
decentralized and autonomous networks.

First we make a chip for every object Then we connect them. We
continue to connect all humans. We enlarge our conversation to in-
clude the world, and all its artifacts. We let the network of objects gov-
ern itself as much as possible; we add government where needed. In
this matrix of connections, we interact and create. This is the net that is
our future.

The whole process won't be completed by tomorrow, but the des-
tiny is clear. We are connecting all to all, until we encompass the entire
human-made world. And in that embrace is a new power.

Strategies

Move technology to invisibility. As technology becomes ubiquitous
it also becomes invisible. The more chips proliferate, the less we will
notice them. The more networking succeeds, the less we'll be aware of
it.

In the early 1900s, at the heroic stage of the industrial economy,
motors were changing the world. Big, heavy motors ran factories and
trains and the gears of automation. If big motors changed work, they
were sure to change the home, too. So the 1918 edition of the Sears,
Roebuck catalog featured the Home Motor — a five-pound electrical
beast that would "lighten the burden of the home." This single Home
Motor would supply all the power needs of a modern family. Also for
sale were plug-ins that attached to the central Home Motor: an egg
beater device, a fan, a mixer, a grinder, a buffer. Any job that needed do-
ing, the handy Home Motor could do. Marc Weiser, a scientist at Xerox,
points out that the electric motor succeeded so well that it became in-
visible. Eighty years later nobody owns a Home Motor. We have instead
dozens of micromotors everywhere. They are so small, so embedded,
and so common that we are unconscious of their presence. We would
have a hard time just listing all the motors whirring in our homes today
(fans, clocks, water pumps, video players, watches, etc.). We know the

20 / New Rules for the New Economy

industrial revolution succeeded because we can no longer see its sol-
diers, the motors.

Computer technology is undergoing the same disappearance. If the
information revolution succeeds, the standalone desktop computer
will eventually vanish. Its chips, its lines of connection, even its visual
interfaces will submerge into our environment until we are no longer
conscious of their presence (except when they fail). As the network age
matures, we'll know that chips and glass fibers have succeeded only
when we forget them. Since the measure of a technology's success
is how invisible it becomes, the best long-term strategy is to develop
products and services that can be ignored.

If it is not animated, animate it. Just as the technology of writing
now covers almost everything we make (not just paper), so too the
technologies of interaction will soon cover all that we make (not just
computers). No artifact will escape the jelly bean chip; everything can
be animated. Yet even before chips reach the penny price, objects can
be integrated into a system as if they are animated. Imagine you had a
million disposable chips. What would you do with them? It's a good bet
that half of the value of those chips could be captured now, with exist-
ing technology, by creating a distributed swarmlike intelligence using
such dumb power.

If it is not connected, connect it. As a first step, every employee of an
institution should have intimate, easy, continuous access to the institu-
tion's medium of choice — email, voicemail, radio, whatever. The ben-
efits of communication often don't kick in until ubiquity is approached;
aim for ubiquity. Every step that promotes cheap, rampant, and univer-
sal connection is a step in the right direction.

Distribute knowledge. Use the minimal amount of data to keep all
parts of a system aware of one another. If you operate a parts ware-
house, for example, your system needs to be knowledgeable of each
part's location every minute. That's done by barcoding everything. But
it needs to go further. Those parts need to be aware of what the sys-
tem knows. The location of parts in a warehouse should shift depend-
ing on how well they sell, what kind of backlog a vendor forecasts, how
their substitutes are selling. The fastest-moving items (which will be
a dynamic list) may want to be positioned for easier picking and ship-

Embrace the Swarm / 21

ping. The items move in response to the outside — if there is a system
to spread the info.

Get machines to talk to one another directly. Information should
flow laterally and not just into a center, but out and between as well.
The question to ask is, "How much do our products/services know
about our business?" How much current knowledge flows back into the
edges? How well do we inform the perimeter, because the perimeter is
the center of action.

If you are not in real time, you're dead. Swarms need real-time com-
munication. Living systems don't have the luxury of waiting overnight
to process an incoming signal. If they had to sleep on it, they could die
in their sleep. With few exceptions, nature reacts in real time. With few
exceptions, business must increasingly react in real time. High transac-
tion costs once prohibited the instantaneous completion of thousands
of tiny transactions; they were piled up instead and processed in cost-
effective batches. But no longer. Why should a phone company get paid
only once a month when you use the phone every day? Instead it will
eventually bill for every call as the call happens, in real time. The flow
of crackers off grocery shelves will be known by the cracker factory in
real time. The weather in California will be instantly felt in the assembly
lines of Ohio. Of course, not all information should flow everywhere;
only the meaningful should be transmitted. But in the network economy
only signals in real time (or close to it) are truly meaningful. Examine
the speed of knowledge in your system. How can it be brought closer
to real time? If this requires the cooperation of subcontractors, distant
partners, and far-flung customers, so much the better.

Count on more being different. A handful of sand grains will never
form an avalanche no matter how hard one tries to do it. Indeed one
could study a single grain of sand for a hundred years and never con-
clude that sand can avalanche. To form avalanches you need millions
of grains. In systems, more is different. A network with a million nodes
acts significantly different from one with hundreds. The two networks
are like separate species — a whale and an ant, or perhaps more accu-
rately, a hive and an ant. Twenty million steel hammers swinging in uni-
son is still 20 million steel hammers. But 20 million computers in a
swarm is much, much more than 20 million individual computers.

22 / New Rules for the New Economy

Do what you can to make "more." In a network the chicken-and-egg
problem can hinder growth at first — there's no audience because there
is no content, and there is no content because there is no audience.
Thus, the first efforts at connecting everything to everything sometimes
yield thin fruit. At first, smart cards look no different from credit cards —
just more inconvenient. But more is different; 20 million smart cards is
a vastly different beast than 20 million credit cards.

It's the small things that change the most in value as they become
"more." A tiny capsule that beeps and displays a number, multiplied by
millions: the pager system. What if all the Gameboys or PlayStations in
the world could talk to one another? What if all the residential electric
meters in a city were connected together into a large swarm? If all the
outdoor thermometers were connected, we would have a picture of our
climate a thousand times better than we have ever had before.

The ants have shown us that there is almost nothing so small in the
world that it can't be made larger by embedding a bit of interaction in
many copies of it, and then connecting them all together.

The game in the network economy will be to find the overlooked
small and figure out the best way to have them embrace the swarm.

2 INCREASING RETURNS

Self-Reinforcing Success

Networks have their own logic. When you connect all to all, curious
things happen.

Mathematics says the sum value of a network increases as the
square of the number of members. In other words, as the number of
nodes in a network increases arithmetically, the value of the network
increases exponentially." Adding a few more members can dramatically
increase the value for all members.

This amazing boom is not hard to visualize. Take 4 acquaintances;
there are 12 distinct one-to-one friendships among them. If we add a
fifth friend to the group, the friendship network increases to 20 different
relations; 6 friends makes 30 connections; 7 makes 42. As the number
of members goes beyond 10, the total number of relationships among
the friends escalates rapidly. When the number of people (n) involved is
large, the total number of connections can be approximated as simply
n x n, or n 2 . Thus a thousand members can have a million friendships.

The magic of n 2 is that when you annex one more new member, you

*l use the vernacular meaning of "exponential" to mean "explosive com-
pounded growth." Technically, n 2 growth should be called polynomial, or even
more precisely, a quadractic; a fixed exponent (2 in this case) is applied to a grow-
ing number n. True exponential growth in mathematics entails a fixed number
(say 2) that has a growing exponent, n, as in 2". The curves of some polynomials
and exponentials look similar, except the exponential is even steeper; in common
discourse the two are lumped together.

24 / New Rules for the New Economy

add many more connections; you get more value than you add. That's
not true in the industrial world. Say you owned a milk factory, and you
had 10 customers who bought milk once a day. If you increased your
customer base by 10% by adding one new customer, you could expect
an increase in milk sales of 10%. That's linear. But say, instead, you
owned a telephone network with 10 customers who talked to each other
once a day. Your customers would make about n 2 (10 2 ), or 100 calls a
day. If you added one more new customer, you increased your customer
base by 10%, but you increased your calling revenue by a whopping
20% (since 11 2 is 20% larger than 10 2 ). In a network economy, small
efforts can lead to large results.

A network's tendency to explode in value mathematically was first
noticed by Bob Metcalfe, the inventor of a localized networking technol-
ogy called Ethernet. During the late 1970s Metcalfe was selling a combi-
nation of Ethernet, Unix, and TCP/IP (the internet protocol), as a way to
make large networks out of many small ones. Metcalfe says, "The idea
that the value of a network equals n squared came to me after I failed
to get networks to work on a small scale, despite many repeated experi-
ments." He noticed that networks needed to achieve critical mass to
make them worthwhile. But he also noticed that as he linked together
small local networks here and there, the value of the combined large
network would multiply abruptly. In 1980 he began formulating his law:
value = n x n.

In fact, n 2 underestimates the total value of network growth. As
economic journalist John Browning notes, the power of a network mul-
tiplies even faster than this. Metcalfe's observation was based on the
idea of a phone network. Each telephone call had one person at each
end; therefore the total number of potential calls was the grand sum of
all possible pairings of people with phones. But online networks, like
personal networks in real life, provide opportunities for complicated
three-way, four-way, or many-way connections. You can not only interact
with your friend Charlie, but with Alice and Bob and Charlie at the same
time. The experience of communicating simultaneously with Charlie's
group in an online world is a distinct experience, separate in its essen-
tial qualities, from communicating with Charlie alone. Therefore, when
we tally up the number of possible connections in a network we have to
add up not only all the combinations in which members can be paired,

Increasing Returns / 25

but also all the possible groups as well. These additional combos send
the total value of the network skyrocketing. The precise arithmetic is
not important. It is enough to know that the worth of a network races
ahead of its input.

This tendency of networks to drastically amplify small inputs leads
to the second key axiom of network logic: the law of increasing returns.
In one way or another this law undergirds much of the strange behavior
in the network economy. The simplest version goes like this: The value
of a network explodes as its membership increases, and then the value
explosion sucks in yet more members, compounding the result.

An old saying puts it succinctly: Them that's got shall get.

A new way of saying it: Networks encourage the successful to be yet
more successful. Economist Brian Arthur calls this effect "increasing
returns." "Increasing returns" he says, "are the tendency for that which
is ahead to get further ahead; for that which loses advantage to lose
further advantage."

In the industrial economy success was self-limiting; it obeyed the
law of decreasing returns. In the network economy, success is self-
reinforcing; it obeys the law of increasing returns.

We see the law of increasing returns operating in the way areas such
as Silicon Valley grow; each successful new start-up attracts other start-
ups, which in turn attract more capital and skills and yet more start-ups.

In networks, we find self-
reinforcing virtuous circles.
Each additional member
increases the network's value,
which in turn attracts more
members, initiating a spiral of
benefits.

26 / New Rules for the New Economy

(Silicon Valley and other high-tech industrial regions are themselves
tightly coupled networks of talent, resources, and opportunities.)

At first glance the law of increasing returns may seem identical to
the familiar textbook notion of economies of scale: The more of a prod-
uct you make, the more efficient the process becomes. Henry Ford lev-
eraged his success in selling automobiles to devise more productive
methods of manufacturing cars. This enabled Ford to sell his cars more
cheaply, which created larger sales, which fueled more innovation and
even better production methods, sending his company to the top.

That self-feeding circle is a positive feedback loop. While the law
of increasing returns and the economies of scale both rely on positive
feedback loops, there are two key differences.

First, industrial economies of scale increase value gradually and lin-
early. Small efforts yield small results; large efforts give large results.
Networks, on the other hand, increase value exponentially — small ef-
forts reinforce one another so that results can quickly snowball into an
avalanche. It's the difference between a piggy bank and compounded
interest.

Second, and more important, industrial economies of scale stem
from the herculean efforts of a single organization to outpace the com-
petition by creating value for less. The expertise (and advantage) de-
veloped by the leading company is its alone. By contrast, networked
increasing returns are created and shared by the entire network. Many
agents, users, and competitors together create the network's value. Al-
though the gains of increasing returns may be reaped unequally by one
organization, the value of the gains resides in the greater web of rela-
tionships.

These positive feedback loops are created by "network externalities."
Anything that creates (or destroys) value which cannot be appointed to
someone's account ledgers is an externality. The total value of a tele-
phone system lies outside the total internal value of the telephone com-
panies and their assets. It lies externally in the greater phone network
itself. Networks are particularly potent sources of external value and
have become a hot spot of economic investigation in the last decade. A
parade of recently published academic papers scrutinize the fine points
of network externalities: When do they arise? How do they break down?

Increasing Returns / 27

Are they symmetrical? Can they be manipulated?

One reason increasing returns and network externalities are garner-
ing attention is because they tend to create apparent monopolies. Huge
amounts of cash pour toward network winners such as Cisco or Oracle
or Microsoft, and that makes everyone else nervous. Are network super-
winners in fact monopolies? They are not like any monopolies of the
industrial age. When antitrust hearings are conducted today, the wit-
nesses are not customers angered by high pricing, haughty service, or
lack of options — the traditional sins of a monopolist. Customers have
nothing to complain about because they get lower prices, better service,
and more features from network superwinners — at least in the short
term. The only ones complaining about superwinners are their com-
petitors, because increasing returns create a winner-take-most environ-
ment. But in the long term, the customer will have reason to complain
if competitors pull back or disappear.

The new monopolies are different in several ways. Traditional mo-
nopolies dominated commodities. In the new order, as Santa Fe Insti-
tute economist Brian Arthur points out, "Dominance may consist not
so much in cornering a single product as in successively taking over
more and more threads of the web of technology." Superwinners can
practice a type of crossover where control of one layer of the web lever-
ages control into others. Owning the standard for voice phone calls can
ease the likelihood of owning the standard for fax transmissions.

The unacceptable transgression of the traditional monopolist was
that as a mono-seller (thus the Greek, mono-polist), it could push
prices up and quality down. But the logic of the net inherently lowers
prices and raises quality, even those of a single-seller monopolist. In
the network economy, the unpardonable transgression is to stifle inno-
vation, which is what happens when competition is stifled. In the new
order, innovation is more important than price because price is a de-
rivative of innovation.

Mono-sellers are actually desirable in a network economy. Because
of increasing returns and n 2 value, a single large pool is superior to
many smaller pools. The network economy will breed mono-sellers with
great fertility. What is intolerable in a network economy is "monova-
tion" — depending upon a single source of innovation. The danger of

28 / New Rules for the New Economy

monopolists in the network economy is not that they can raise prices
but they can become monovationists. But there are ways to encourage
"polyvation" — multiple sources of innovation — in a world of monopo-
lists: by creating open systems, by moving key intellectual properties
into the public domain, by releasing source code democratically. As we
come to understand the importance of increasing returns and the other
new rules of the network economy, we can expect shifts in our under-
standing of the role of market winners.

Industrial monopolies exploited simple economies of scale for their
own benefit. Network effects are not about economies of scale, they are
about value that is created above and beyond a single organization — by
a larger network — and then returned to the parts, often unevenly. Be-
cause some portion of the value of a network firm so obviously comes
from external sources, allegiance is often granted to external sources.

We see this in the way network effects govern the growth of Silicon
Valley. Silicon Valley's success is external to any particular company's
success, and so loyalty is external, too. As AnnaLee Saxenian, author of
Regional Advantage, notes, Silicon Valley has in effect become one large,
distributed company. People job-hop so frequently that folks "joke that
you can change jobs without changing car pools. Some say they wake
up thinking they work for Silicon Valley. Their loyalty is more to advanc-
ing technology or to the region than it is to any individual firm."

This trend seems likely to extend further. We are headed into an era
when both workers and consumers will feel more loyalty to a network
than to any ordinary firm. The great innovation of Silicon Valley is not
the wowie-zowie hardware and software it has invented. Silicon Valley's
greatest "product" is the social organization of its companies and, most
important, the networked architecture of the region itself — the tangled
web of former jobs, intimate colleagues, information leakage from one
firm to the next, rapid company life cycles, and agile email culture. This
social web, suffused into the warm hardware of jelly bean chips and
copper neurons, creates a true network economy.

The social web, even in the Valley, displays some stress marks. There
is no question that the network economy is, at worst, winner-take-all,
and at best, winner-take-most. The trajectory of increasing returns and
a shortage of attention focuses success toward a few points. Stars and
hits rise, while the rest languish. Mundane appliances and bulky objects

Increasing Returns / 29

now seem to follow the Hollywood model: A few brands sell like crazy,
and the rest sell only a few. It's a "hits" economy, where resources flow
to those that show some life. If a new novel, new product, or new ser-
vice begins to succeed it is fed more; if it falters, it's left to wither. Them
that has, gets more.

The current great debate is whether the law of increasing returns
favors the early or not. In some of the first studies of increasing returns,
economist Brian Arthur discovered that when technological competi-
tors, such as the VHS and Betamax video formats, were modeled in a
computer, increasing returns favored one technology over the other —
to the eventual demise of the unfortunate one (in this case Betamax).
And "unfortunate" is the right word. According to Arthur's research, the
technology that came to dominate, thanks to increasing returns, was
not necessarily the superior one. It was just the lucky one. Or the early
one. Arthur writes: "If a product or a company or a technology — one of
many competing in a market — gets ahead by chance or clever strategy,
increasing returns can magnify this advantage, and the product or com-
pany can go on to lock in the market."

All things being equal, early success has a measurable advantage.
But in real life all things are rarely equal. Technologies which seem to
be inferior and yet prevail through the dynamics of increased returns
often reveal themselves under further study to be slightly superior in
key ways. The Sony Betamax format lost to VHS because it couldn't
record for as long as VHS could, and, according to some, because Sony
discouraged Beta use for porno — an early use of video. Apple Comput-
er's superior operating system lost to Windows because Apple had an
inferior price — due to its misguided monopolist strategy. The suppos-
edly ergonomic Dvorak keyboard lost to the all-too-familiar QWERTY
keyboard because the Dvorak layout really wasn't any faster.

Being first or best sometimes helps, but not always. The outcome
of competition in a network is not determined solely by the abilities of
the competitors, but by tiny differences, including luck, that are greatly
magnified by the power of positive feedback loops. The fate of com-
petition is "path dependent" on minor nudges and hurdles that can
"tip" the system in one direction or another. Final destiny cannot be
predicted on the basis of exceptional attributes alone.

What can be predicted is the way in which networks enlarge small

30 / New Rules for the New Economy

advantages, and then lock the advantage in. In the same way, initial pa-
rameters and conventions can quickly freeze into unalterable stan-
dards. The solidifying standards of a network are both a blessing and a
curse — a blessing because the ad hoc agreement reduces risk, and thus
sparks widespread progress, and a curse because those who own or
control the standard are disproportionately rewarded.

But the network economy doesn't allow the blessing without the
curse. Microsoft's billions are tolerated (more or less) because so many
others in the network economy have made their collective billions on
the advantages of Microsoft's increasing-returns standards.

We forget how recent and sudden Microsoft's prominence is. Micro-
soft is a textbook example of Metcalfe's law ("The value of Windows in-
creases exponentially as its users increase arithmetically") and the law
of increasing returns ("The more who use NT, the more attractive NT
becomes"). Microsoft also illustrates the third corollary of increasing
returns: how small signals can suddenly become booms.

During its first 10 years, Microsoft's profits were negligible. Its prof-
its rose above the background noise of Wall Street only around 1985.
But once they began to rise, they exploded. A chart of Microsoft's cor-
nucopia of profits is an exponentially booming curve, one that parallels
several other rising stars in the network economy.

Federal Express experienced a similar trajectory: years of minuscule
profit increases, slowly ramping up to an invisible threshold, and then
surging skyward in a blast sometime during the early 1980s.

The story of fax machines is likewise a tale of a 20-year-long over-
night success. After two decades of marginal success, the number of
fax machines quietly crossed the point of no return during the mid-

Network organizations
experience small gains
while their network is being
seeded. Once the network is
established, explosive growth
follows with relatively little
additional genius.

Increasing Returns / 31

1980s — and the next thing you know, they were everywhere.

The archetypal case of a success explosion in a network economy
is the Internet itself. As any proud old-time nethead will be happy to
explain, the internet was a lonely (but thrilling!) cultural backwater for
two decades before it showed up on the media radar. A graph of the
number of internet hosts worldwide, starting in the 1970s, stays barely
above the bottom line, until around 1991, when the global tally of hosts
suddenly mushroomed, exponentially acting upward to take over the
world.

The curves of Microsoft, the internet, fax machines and FedEx (I
owe Net Gain author John Hagel credit for these four examples) are
templates of exponential growth, compounding in a biological way.
Such curves are almost the definition of a biological system. That's one
reason the network economy is often described most accurately in bio-
logical terms. Indeed, if the web feels like a frontier, it's because for the
first time in history we are witnessing biological growth in technological
systems.

A good definition of a network is organic behavior in a technological
matrix.

The compounded successes of Microsoft, FedEx, fax machines, and
the internet all hinge on the prime law of networks: Value explodes ex-
ponentially with membership, and this heightened value acts like grav-
ity drawing in yet more members. The virtuous circle inflates until all
potential members are joined.

This explosion, however, did not ignite until approximately the late
1980s. Two things happened then — the dual big bangs of almost-free
jelly bean chips and collapsing telco charges. It became feasible — that
is, dirt cheap — to exchange data almost anywhere, anytime. The net,
the grand net, began to precipitate out of this supersaturated solution.
Network power followed.

One of the hallmarks of the industrial age was its reasonable expec-
tations. Success was in proportion to effort. Small effort, small gains.
Large effort, large gains. This linear ratio is typical of capital invest-
ments and resource allotments. According to data from the U.S. Statis-
tical Abstract, the best-selling products in the 1950s — appliances such

32 / New Rules for the New Economy

as refrigerators, clocks and washing machines — sold steadily with only
a slight 2% annual increase in the number of units sold per year. To
imagine the future of an enterprise or innovation one needed only to
extrapolate the current trends in a straight line. There was a comfort-
able assumption — largely true — that the world proceeded linearly. En-
tirely new phenomenona did not ordinarily appear out of nowhere and
change everything within months.

With the advent of large-scale electronic media networks in the mid
century, that assumption began to erode. Millions of kids watching
TV grew up to create rapid fads (hula hoops), instant youth cultures
such as the beats and hippies, with sudden spontaneous gatherings
of half a million, as at Woodstock. Events did not happen linearly. With
media networks it was no longer safe to extrapolate the future from
the recent past. When success came, it often fed on itself in crazy hy-
perkinetic booms. The recent sales of electronic pets is one example.
Tamagotchis, the original brand of Japanese toy pets, went from sales
of zero in Japan to 10 million units in their first year, to 20 million by
the second year. When they were introduced in the United States a half
million units were sold in the first month. The Tamagotchis could be
actual breeding animals judging simply from their growth rate because
their sales curve follows the population curve of reproducing biological
animals. One day there are two pets, the next year there are 200. In bio-
logical populations, success can easily compound into runaway growth;
now this wild runaway growth is happening with technology.

Everyday we see evidence of biological growth in technological sys-
tems. This is one of the marks of the network economy: that biology
has taken root in technology. And this is one of the reasons why net-
works change everything.

Here's how this happened. Most of the technology in the early part
of the century was relegated to the inside of a factory. Only business-
men cared about advancing technology — cheaper production methods
or more specialized materials. The consumer products this advanced
technology spun off into homes were, more often than not, labor-sav-
ing devices — sewing machines, vacuum cleaners, water pumps. They
saved time, and thereby enhanced the prevailing culture. But the de-

Increasing Returns / 33

vices themselves (except for the automobile) were merely gadgets.
They were technology — something foreign, best used in small doses,
and clearly not the social and economic center of our lives. It was once
very easy to ignore technology because it did not penetrate the areas of
our lives we have always really cared about: our networks of friendship,
writing, painting, cultural arts, relationships, self-identity, civil organi-
zations, the nature of work, the acquisition of wealth, and power. But
with the steady advent of technology into the networks of communica-
tion and transportation, technology has completely overwhelmed these
social areas. Our social space has been invaded by the telegraph, the
phonograph, the telephone, the photograph, the television, the airplane
and car, then by the computer, and the internet, and now by the web.

Technology has become our culture, our culture technology.

Technology is no longer outside, no longer alien, no longer at the
periphery. It is at the center of our lives. "Technology is the campfire
around which we gather," says musician/artist Laurie Anderson. For
many decades high tech was marginal in presence. Then suddenly —
blink — it is everywhere and all-important.

Technology has been able to infiltrate into our lives to the degree it
has because it has become more like us. It's become organic in struc-
ture. Because network technology behaves more like an organism than
like a machine, biological metaphors are far more useful than mechani-
cal ones in understanding how the network economy runs.

But if success follows a biological model, so does failure. A caution-
ary tale: One day, along the beach, tiny red algae suddenly blooms into
a vast red tide. A few weeks later, just when the red mat seems indelible,
it vanishes. Lemmings boom, then disappear as suddenly. The same bi-
ological forces that multiply populations can decimate them. The same
forces that feed on one another to amplify network presences creating
powerful standards overnight can also work in reverse to unravel them
in a blink. The same forces that converge to build up organizations in
so biological a fashion can also converge to tear them down. One can
expect that when Microsoft's fortunes falter, their profits will plunge in
a curve inversely symmetrical to their success. All the self-reinforcing
reasons to join a network's success run in reverse when the success

34 / New Rules for the New Economy

turns to failure and everyone wants to flee.

One more biological insight can be gleaned from the success of
Microsoft, FedEx, and the internet. In retrospect one can see that at
some point in their history the momentum toward them became so
overwhelming that success became a runaway event. Success became
infectious, so to speak, and spread pervasively to the extent that it be-
came difficult for the uninfected to avoid succumbing. Take the arrival
of the phone network. How long can you hold out not having a phone?
Only 6% of U.S. homes are still holding out.

In epidemiology, the point at which a disease has infected enough
hosts that it must be considered a raging epidemic can be thought of as
the tipping point. The contagion's momentum has tipped from push-
ing uphill against all odds to rolling downhill with all odds behind it. In
biology, the tipping points of fatal diseases are fairly high, but in tech-
nology, they seem to be triggered at much lower points.

There has always been a tipping point in any business, industrial or
network, after which success feeds upon itself. However, the low fixed
costs, insignificant marginal costs, and rapid distribution that we find
in the network economy depresses tipping points below the levels of in-
dustrial times; it is as if the new bugs are more contagious — and more
potent. It takes a smaller initial pool to lead to runaway dominance,
sooner.

Lower tipping points also mean that the threshold of significance —
the period before the tipping point during which a movement, growth,

During the exponential
gains peculiar to networks,
compounding effects can pass
a point of runaway growth. But
it is before this point, before
momentum builds, that one
needs to pay attention.

or innovation must be taken seriously — is also dramatically lower than
it was during the industrial age. Detecting developments while they are

Increasing Returns / 35

beneath this threshold of significance is essential.

Major U.S. retailers refused to pay attention to TV home-shopping
networks during the 1980s because the number of people watching and
buying from them was initially so small and marginalized that it did
not meet the established level of retail significance. The largest U.S. re-
tailers work in the realm of hundreds of millions. The first TV home
shopping was dealing in the realm of thousands. Retailers discovered
that shoppers would watch 50 hours of home-shopping programs be-
fore making their first purchase. The retailers considered this horrible
news. But it turns out "watching others do it" was an initiation ritual.
Shoppers trust other shoppers. Once shoppers were "invested" in the
process by watching many others do it successfully, they kept coming
back. So small numbers grew steadily and then rapidly as more shop-
pers brought in yet more shoppers. Instead of heeding the new subtle
threshold of network economics, the retailers waited until the alarm of
the tipping point sounded, which meant, by definition, that it was too
late for them to cash in.

In the past, an innovation's momentum indicated significance. Now,
in the network environment, where biological behavior reigns, signifi-
cance precedes momentum.

One final parable rooted in biology. In a pond one summer a float-
ing lily leaf doubles in size every day until it covers the entire surface of
water. The day before it completely covers the pond, the water is only
half covered, and the day before that, only a quarter covered, and the
day before that, only a measly eighth. While the lily grows imperceptibly
all summer long, only in the last week of the cycle would most bystand-
ers notice its "sudden" appearance. By then, it is far past the tipping
point.

The network economy is like a lily pond. Most of the pond looks
empty, but a few lilies are doubling in size. The web, for example, is a
leaf doubling every six months. Despite the one million web sites to
date, the web's future has just begun. Other lily leaves are sprouting
along the edges of the pond: MUDs, Irridium phones, wireless data
ports, collaborative bots, WebTV, and remote solid state sensors. Right
now, they are all just itsy-bitsy lily cells brewing at the beginning of a hot

36 / New Rules for the New Economy

network summer. One by one, they will pass their tipping points, and
suddenly become ubiquitous.

Strategies

Check for externalities. The initial stages of exponential growth looks
as flat as any new growth. How can you detect significance before mo-
mentum? By determining whether embryonic growth is due to network
effects rather than to the firm's direct efforts. Do increasing returns,
open systems, n 2 members, multiple gateways to multiple networks
play a part? Products or companies or technologies that get slightly
ahead — even when they are second best — by exploiting the net's effects
are prime candidates for exponential growth.

Coordinate smaller webs. The fastest way to amp up the worth of
your own network is to bring smaller networks together with it so they
can act as one larger network and gain the total n 2 value. The inter-
net won this way. It was the network of networks, the stuff in between
that glued highly diverse existing networks together. Can you take the
auto parts supply network and coordinate it with the insurance adjust-
ers network plus the garage repair network? Can you coordinate the in-
tersection of hospital records with standard search engine technology?
Do the networks of county property deed databases, U.S. patents, and
small-town lawyers have anything useful in common? One thousand
members in one network are far more powerful than one thousand
members in three networks.

Create feedback loops. Networks sprout connections and connec-
tions sprout feedback loops. There are two elementary kinds of loops:
Self-negating loops such as thermostats and toilet bowl valves, which
create feedback loops that regulate themselves, and self-reinforcing
loops, which are loops that foster runaway growth such as increasing
returns and network effects. Thousands of complicated loops are pos-
sible using combinations of these two forces. When internet providers
first started up, most charged users steeper fees to log on via high-
speed modem; the providers feared speedier modems would mean

Increasing Returns / 37

fewer hours of billable online time. The higher fees formed a feedback
loop that subsidized the provider's purchase of better modems, but
discouraged users from buying them. But one provider charged less
for high speed. This maverick created a loop that rewarded users to
buy high-speed modems; they got more per hour and so stayed longer.
Although it initially had to sink much more capital into its own modem
purchases, the maverick created a huge network of high-speed freaks
who not only bought their own deluxe modems but had few alternative
places to go at high speed. The maverick provider prospered. As a new
economy business concept, understanding feedback is as important as
return-on-investment.

Protect long incubations. Because the network economy favors the
nimble and quick, anything requiring patience and slowness is handi-
capped. Yet many projects, companies, and technologies grow best
gradually, slowly accumulating complexity and richness. During their
gestation period they will not be able to compete with the early birds,
and later, because of the law of increasing returns, they may find it dif-
ficult to compete as well. Latecomers have to follow Drucker's Rule —
they must be ten times better than what they hope to displace. Delayed
participation often makes sense when the new offering can increase
the ways to participate. A late entry into the digital camera field, for in-
stance, which offered compatibility with cable TV as well as PCs, could
make the wait worthwhile.

It's a hits game for everyone. In the network economy the winner-
take-all behavior of Hollywood hit movies will become the norm for
most products — even bulky manufactured items. Oil wells are financed
this way now; a few big gushers pay for the many dry wells. You try a
whole bunch of ideas with no foreknowledge of which ones will work.
Your only certainty is that each idea will either soar or flop, with little in
between. A few high-scoring hits have to pay for all the many flops. This
lotterylike economic model is an anathema to industrialists, but that's
how network economies work. There is much to learn from long-term
survivors in existing hits-oriented business (such as music and books).
They know you need to keep trying lots of things and that you don't try
to predict the hits, because you can't.

Two economists proved that hits — at least in show biz — were unpre-

38 / New Rules for the New Economy

dictable. They plotted sales of first-run movies between May 1985 and
January 1986 and discovered that "the only reliable predictor of a film's
box office was its performance the previous week. Nothing else seemed
to matter — not the genre of the film, not its cast, not its budget."
The higher it was last week, the more likely it will be high this week —
an increasing returns loop fed by word of mouth recommendations.
The economists, Art De Vany and David Walls, claim these results
mirror a heavy duty physics equation known as the Bose-Einstein distri-
bution. The fact that the only variable that influenced the result was the
result from the week before, means, they say, that "the film industry is
a complex adaptive system poised between order and chaos." In other
words, it follows the logic of the net: increasing returns and persistent
disequilibrium.

l^ENTITUDE, NOT SCAR-
Value Flows from Abundance

Plentitude, not scarcity, governs the network economy. Duplication,
replication, and copies run in excess. Whatever can be made, can be
made in abundance. This plentitude:

■ drives value

■ works to open up closed systems

■ spins offimmense numbers of opportunities

Consider the first modern fax machine that rolled off the conveyor
belt around 1965. Despite millions of dollars spent on its R&D, it was
worth nothing. Zero. The second fax machine to be made immedi-
ately made the first one worth something. There was someone to fax
to. Because fax machines are linked into a network, each additional fax
machine that is shipped increases the value of all the fax machines op-
erating before it.

This is called the fax effect. The fax effect dictates that plentitude
generates value.

So strong is this power of plentitude that anyone purchasing a fax
machine becomes an evangelist for the fax network. "Do you have a
fax?" fax owners ask you. "You should get one." Why? Because your
purchase increases the worth of their machine. And once you join the
network, you'll begin to ask others, "Do you have a fax (or email, or
Acrobat software, etc.)?" Each additional account you can persuade to
join the network substantially increases the value of your account.

When you buy a fax machine, you are not merely buying a $200 box.

40 / New Rules for the New Economy

Your $200 purchases the entire network of all other fax machines in
the world and the connections among them — a value far greater than
the cost of all the separate machines. Indeed, the first fax machines
cost several thousands of dollars and connected to only a few other
machines, and thus were not worth much. Today $200 will buy you a
fax network worth $3 billion.

$1 ,000

Buys $1 Million

$200

Buys $3 Billion

The low price of a fax machine
today buys you an entire
network, consisting of eighteen
million machines. Each
additional unit sold increases
the value of your machine.

In the network economy, the more plentiful things become, the more
valuable they become.

This notion directly contradicts two of the most fundamental axi-
oms we inherited from the industrial age.

First hoary axiom: Value comes from scarcity. Take the icons of
wealth in the industrial age — diamonds, gold, oil, and college degrees.
These were deemed precious because they were scarce.

Second hoary axiom: When things are made plentiful, they become
devalued. For instance, carpets. They were once rare handmade items
found only in houses of the rich. They ceased to be status symbols when
they could be woven by the thousands on machines. The traditional law
was fulfilled: commonness reduces value.

The logic of the network flips this industrial lesson upside down.
In a network economy, value is derived from plentitude, just as a fax
machine's value increases as fax machines become ubiquitous. Power
comes from abundance. Copies are cheap. Let them proliferate.

Ever since Gutenberg made the first commodity — cheaply dupli-
cated words — we have realized that intangible things can easily be

Plentitude, Not Scarcity / 41

copied. This lowers the value per copy. What becomes valuable is the
relationships — sparked by the copies — that tangle up in the network
itself. The relationships rocket upward in value as the parts increase in
number even slightly.

Windows NT, fax machines, TCP/IP, GIF images, RealAudio — all
born deep in the network economy — adhere to this logic. But so do met-
ric wrenches, triple-A batteries, and other devices that rely on universal
standards. The more common they are, the more it pays you to stick to
that standard. We have an even older example in the English language.
Wherever the expense of churning out another copy becomes trivial (and
this is happening in more than software), the value of standards and
the network booms.

In the future, cotton shirts, bottles of vitamins, chain saws, and the
rest of the industrial objects in the world will also obey the law of plenti-
tude as the cost of producing an additional copy of them falls steeply.

Proprietary, or "closed," systems were once rare because indus-
trial systems were relatively uncomplicated. Proprietary systems rose
in popularity as advancing technology made it difficult to replicate a
system without assistance or encroaching on patents. The creators of a
closed system made a nice living. When the information economy was
first launched several decades ago, the dream was to own and operate a
proprietary system — one that no one else could copy — and then let the
money roll in. To a degree that can still be done, at least for short pe-
riod, if the system is significantly superior. Bloomberg terminals in Wall
Street traders' offices is one current example. But the network economy
rewards the plentitude of open systems more than the scarcity of closed
systems. It is a bit of a cliche now to blame Apple's misfortunes on its
insistence that its operating systems be treated as a scarce resource
but it's true. Apple had more than one opportunity to license its par-
ticularly wonderful interface — the now familiar desktop and windows
design — but backed off each time, thereby guaranteeing its eventual
eclipse by the relatively more open DOS and Windows systems.

There is a place for isolation in the infancy of systems, but open-
ness is needed for growth because it taps into a larger wealth. Citibank
pioneered the use of 24-hour instant cash at ATMs in the 1970s. They
blanketed New York City with their proprietary machines, and at first
this strategy was highly successful. Smaller competing banks started

42 / New Rules for the New Economy

their own tiny and proprietary ATM networks, but they couldn't com-
pete against the high penetration of Citibank machines. Then, led by
Chemical Bank, these smaller banks banded together to form an open
ATM network called Plus. The power of n 2 kicked in. Suddenly any ATM
was your ATM. Citibank was invited to join the open Plus network but
declined. Following the principle of increasing returns, the handy Plus
system attracted more and more customers, and soon overwhelmed
the once dominant Citibank. Eventually the open factor forced Citibank
to forgo their proprietary ways and join.

Every time a closed system opens, it begins to interact more directly
with other existing systems, and therefore acquires all the value of
those systems.

In the mid 1980s I was associated with a pioneering online com-
munity called the Well. You dialed the Well's special modem, and once
logged on you could chat, post, and email anyone you wanted — within
the Well. All 2,000 members. Within a short time after start-up the Well
made a big jump and opened its mail service to the then-obscure inter-
net. The value of the Well suddenly skyrocketed in the view of its 2,000
or so members because now they could email thousands of academic
professors or corporate nerds. A few years later, the Well further opened
up its system to a capability called ftp, which allowed Well users to grab
files on other internet servers and allowed others to grab files on the
Well server. Again, the value of the Well exploded; with only a small ef-
fort it gained the tremendous value of the entire ftp network. Eventually
the Well opened up even further, allowing users to join the conversation
via the web, thereby acquiring all the value of the web.

There was a cost in each step. With every inclusion there was less
control of the environment, more noise, more danger of disruption by
accident or hacker, and more worry that the business model would col-
lapse. At the same time it was obvious that a totally closed Well would
have died.

The idea of plentitude is to create something that has as many sys-
tems and standards flowing through it as possible. The more networks
a thing touches, the more valuable it becomes.

Plentitude, Not Scarcity / 43

The value of an invention, company, or technology increases exponen-
tially as the number of systems it participates with increases linearly.

The law of plentitude is not about dominance. The self-interest
of ordinary business guarantees that every company in the world will
strive to get its product or service into every home, or into every store.
Popularity is an ancient goal. But that is not what network plentitude
strives for.

The abundance upon which the network economy is built is one of
opportunity.

While it is true that every additional email address in the world in-
creases the value of all previous email addresses (that's the primary
effect of plentitude) the increase in value happens because each email
address is a node of opportunity, not just an artifact. An email address
is more than a way to exchange memos. Because email is rooted in a
network, opportunity runs in several directions at once. For instance,
once it was realized that mail addresses could be archived easily (op-
portunity number one), it occurred to someone that they could be col-
lected automatically (opportunity two). They could also be mailed to
in bulk (opportunity three). The domain part of the address could be
analyzed and used to detect patterns of usage (opportunity four). Ad-
dresses in a Rolodex could be updated automatically by the addressee
(opportunity five). The address artifact itself could contain more than
just a name; it could also hold other facets of interests that the owner

was willing to exchange in certain circumstances (opportunity six).

A hammer is part of only a
few networks, but a telephone
is a part of many. The more
networks a product or service
can join, the more powerful it
becomes.

44 / New Rules for the New Economy

Contrast this cascading abundance of opportunities with almost any
product of the industrial age — say an electric rotary saw, or a color-fast
dye, or a maplewood chair. While some of these objects have a few dual
uses (the chair could be used as a step stool or to wedge a door open,
and the saw motor could be used to drive a drill), they are pretty much
limited to their designed intentions. There is no river of opportunities
flowing from them. So that even if chairs, dye, and saws were to be-
come universally abundant, their physical plentitude would not change
the world much.

The power of the fax effect — more fax machines increasing the value
of all previous machines — does not rely on the proliferation of Pana-
sonic brand fax machines, or of any particular machine. Since many
faxes are sent from laptop computers, or from a server somewhere, the
power of plenty derives from opportunities rather than lumps of mat-
ter.

As opportunities proliferate, unintended uses take off. In the late
1970s, the Shah of Iran exiled his rival, the Ayatollah Khomeini, to Paris.
Since the Shah controlled his country's media he assumed Khomeini
would not be able to reach the Iranian people from France to stir up
trouble. But sympathetic Iranian clergy exploited an unsuspected tech-
nological opportunity: the cassette tape. Every week in Paris Khomeini's
friends recorded his inflammatory speeches on cheap recorders and
smuggled copies (easily disguised as music tapes) into Iran, to be mul-
tiplied on $200 duplication machines and passed out to every mosque.
On Fridays, Khomeini's sermons were played throughout Iran on boom-
boxes. The clerics turned the common tape deck into a broadcast net-
work. I'm sure that not a single engineer who developed cassette tape
technology ever envisioned it being used for broadcasting. Electronic
media, because it is animated by electrons, is highly susceptible to be-
ing subverted by new uses.

Recently Sprint, the telecommunications company, pioneered flat
cellular phone pricing — you could make all the cell phone calls you
want for a fixed monthly fee. Within days of the pricing, the startled
marketing experts at Sprint heard reports that people were using the
cell phones as baby monitors. Parents would go into baby's bedroom
with a cell phone, dial the kitchen, and then leave the line open. Voila!

Plentitude, Not Scarcity / 45

The more interconnected a technology is, the more opportunities it
spawns for both use and misuse.

Some of the best video games of all time were elegant little programs
that ran on early computers such as the Commodore 64. Millions of
C-64S were sold during the early 1980s; most of them lie at the bottom
of landfills today. Their flealike memories and lack of disk space have
been replaced by Powerbooks and Pentiums. The few still working are
sold at collector's prices. But out on the web, filling niches no one could
have predicted, are a flock of emulators. You can download a Commo-
dore 64 emulator onto your Powerbook. At the click of a button it will
turn your state-of-the-art workstation into a moronic C-64 (or one of 25
other golden oldies) so you can play an ancient version of Moondust,
or PacMan. This is equivalent to having a switch on the dashboard of
your Ferrari to make it run like a VW Bug.

These refreshing street uses for technology stem from the plenti-
tude of interactions. Artifacts of the industrial economy yield limited
potential for such weird, tangential uses. The network economy, on the
other hand, is a cornucopia of products and innovations that cry out to
be subverted in new ways. Indeed, in a network, new opportunities arise
primarily when existing opportunities are seized. A business that suc-
cessfully occupies a niche immediately creates at least two new niches
for other businesses. There is, for example, no end to the number of
companies that will find a niche in email; the more wild ideas that are
created, the more wild ideas can be created. The arms race between
spammers and readers is only in its infancy.

The law of plentitude is most accurately rendered thus: In a network,
the more opportunities that are taken, the faster new opportunities
arise.

Furthermore, the number of new opportunities increases exponen-
tially as existing opportunities are seized. Networks spew fecundity
because by connecting everything to everything, they increase the num-
ber of potential relationships, and out of relationships come products,
services, and intangibles.

46 / New Rules for the New Economy

A standalone object, no matter how well designed, has limited po-
tential for new weirdness. A connected object, one that is a node in a
network that interacts in some way with other nodes, can give birth to a
hundred unique relationships that it never could do while unconnected.
Out of this tangle of possible links come myriad new niches for innova-
tions and interactions.

A network is a possibility factory.

So tremendous is the fount of plentitude in the network economy
that having to deal with nearly infinite choices and mushrooming pos-
sibilities may be the limiting factor in the future. Navigating sanely
through an expanding ocean of options is already difficult. The typical
supermarket in America offers 30,000 to 40,000 products. The average
shopper will zoom through the store in 21 minutes, and select out of
those 40,000 choices about 18 items. This is an amazing feat of deci-
sion making. But it is nothing compared to what happens on the web.
There are one million indexed web sites, containing 250 million pages.
To be able to find the right page out of that universe is astounding,
and the number of pages doubles every year. Dealing with this plenti-
tude is critical because the totals of everything we manufacture in the
world are only compounding. The total amount of information stored
in the entire world — that's counting all the libraries, film vaults, and
data archives — is estimated to be about 2,000 petabytes. (A petabyte is
a billion megabytes, or about a quadrillion books the size of this one.)
That's a lot of bits.

Plentitude will soon reach the level of zillionics. We know from
mathematics that systems containing very, very large numbers of parts
behave significantly different from systems with fewer than a million
parts. Zillionics is the state of supreme abundance, of parts in the many
millions. The network economy promises zillions of parts, zillions of ar-
tifacts, zillions of documents, zillions of bots, zillions of network nodes,
zillions of connections, and zillions of combinations. Zillionics is a
realm much more at home in biology — where there have been zillions
of genes and organisms for a long time — than in our recent manufac-
tured world. Living systems know how to handle zillionics. Our own
methods of dealing with zillionic plentitude will mimic biology.

Plentitude, Not Scarcity / 47

The network economy runs with plentitude. It vastly expands the
numbers of things, increases the numbers of intangibles with ease,
multiplies the numbers of connections exponentially, and creates new
opportunities without number.

Strategies

Touch as many nets as you can. Because the value of an action in the
network economy multiplies exponentially by the number of networks
that action flows through, you want to touch as many other networks
as you can reach. This is plentitude. You want to maximize the number
of relations flowing to and from you, or your service or product. Imag-
ine your creation as being born inert, like a door nail off a factory con-
veyor belt. The job in the network economy is to link the nail to as many
other systems as possible. You want to adapt it to the contractor sys-
tem by making it a standard contractor size so that it fits into standard
air-powered hammers. You want to give it a SKU designation so it can
be handled by the retail sales network. It may want a bar code so it
can be read by a laser-read checkout system. Eventually, you want it to
incorporate a little bit of interacting silicon, so it can warn the door of
breakage, and take part in the smart house network. For every additional
system the nail is a part of, it gains in value. Best of all, the systems and
all their members also gain in value from every nail that joins.

And that's just for a stick of iron. More complex objects and services
are capable of permeating far more systems and networks, thus greatly
boosting their own value and the plentiful value of all the systems they
touch.

Maximize the opportunities of others. In every aspect of your busi-
ness (and personal life) try to allow others to build their success around
your own success. If you run a hotel, what can you do to permit oth-
ers — airlines, luggage retailers, tour guides — to be part of your net-
work? Rather than viewing their dependency on your success as a form
of parasitism, or worse, as a rip-off, understand this tight coupling
as sustenance. You want to entice others to create services centered
around the customer attention you have won, or to supply add-ons to
your product, or even, if it is a new-fangled idea, to create legal imita-

48 / New Rules for the New Economy

tions. This is a counterintuitive stance at first, but it plays right into the
logic of the net. A small piece of an expanding pie is the biggest piece
of all. Software is especially primed to work this way. The programmers
who created the hit game Doom deliberately made it easy to modify. The
results: Hundreds of other gamers issued versions of Doom that were
vastly better than the original, but that ran on the Doom system. Doom
boomed and so did some of the derivatives. The software economy is
full of such examples. Third-party templates for spreadsheets, word
processors, and browsers make profits for both the third-party vendor
and the host system. It takes only a bit of imagination to see how the
leveraging of opportunities also works in domains outside of software.
When confronted with a fork in the road, if all things are equal, go down
the path that makes the opportunities of others plentiful.

Don't pamper commodities; let them flow. The cost of replicating
anything will continue to go down. As it does, the primary cost will be
developing the first copy, and then getting attention to it. No longer will
it be necessary to coddle most products. Instead they should be liber-
ated to flow everywhere. Let's take pharmaceuticals, especially geneti-
cally bio-engineered pharmaceuticals. The cost of little pills in the drug
store can be hundreds of times greater than what they cost to produce
in quantity, yet many drugs are priced expensively in order to recoup
their astronomical development costs. Pharmaceutical companies treat
and price their drugs as scarcities. One can expect, however, that in
the future, as drug design becomes more networked, more data-driven,
more computer mediated, and as drugs themselves become smarter,
more adaptive, more animated, the competitive advantage will go to
those companies that let "copies" of the drug flow in plentitude. For
example, a highly evolved bioengineered headache relief drug may
be sold for a few dollars on a "take as much as you need" basis. The
company makes its profits when you pay it handsomely for tailoring
that drug specifically for your DNA and your body. Once designed, you
pay almost nothing for additional refills. Indeed there are already a few
start-up biotech companies headed this way. The field is called pharma-
genomics. They are heeding the call of plentitude.

Avoid proprietary systems. Sooner or later closed systems have to
open up, or die. If an online service requires dialing a special phone
number to reach it, it's moribund. If it needs a special gizmo to read

Plentitude, Not Scarcity / 49

it, it's kaput. If it can't share what it knows with competing goods, it's
a loser. Closed systems close off opportunities for others, making le-
verage points scarce. This is why the network economy — which is bi-
ased toward plenty — routes around closed systems. One could safely
bet that America Online, WebTV, and Microsoft Network (MSN) — three
somewhat closed systems — will eventually go entirely onto the open
web, or disappear. The key issue in closed-versus-open isn't private ver-
sus public, or who owns a system; often private ownership can encour-
age innovation. The issue is whether it is easy or difficult for others to
invent something that plays off your invention. The strategic question
is simple: How easy is it for someone outside of the host company to
contribute an advance to their system or product or service? Are the op-
portunities for participating in your own network scarce or plentiful?

Don't seek refuge in scarcity. Every era is marked by the wealth of
those who figure out what the new scarcity is. There will certainly be
scarcities in the network economy. But far greater wealth will be made
by exploiting the plentitude. To make sure you are not seeking refuge
in scarcity, ask yourself this question: Will your creation thrive if it
becomes ubiquitous? If its value depends on only a few using it, you
should reconsider it in light of the new rules.

4 FOLLOW THE FREE

Why the Net Rewards Gener-
osity

The very best gets cheaper each year. This principle is so ingrained in
our lifestyle that we bank on it without marveling at it. But marvel we
should, because this paradox is a major engine of the new economy.

Before the industrial age, consumers could expect only slight im-
provements in quality for slight increases in price. Over the years the
improved cost more. But with the arrival of automation and cheap en-
ergy in the industrial age, manufacturers could invert the equation: They
offered lower costs and increased quality. Between 1906, when autos
were first being made, and 1910, only four years later, the cost of the av-
erage car had dropped 24%, while its quality rose by 31%. By 1918, the
average car was 53% cheaper than its 1906 counterpart, and 100% bet-
ter in performance quality. The better-gets-cheaper magic had begun.

The arrival of the microprocessor accelerated this wizardry. In the
information age, consumers quickly have come to count on drastically
superior quality for drastically reduced price over time. A sensible rec-
ommendation to anyone asking for shopping advice today is that they
should delay buying a consumer good until about 60 seconds before they
actually need it. Indeed, a transportation specialist told me that almost
nothing in the information industry is shipped by sea anymore; it all goes
by air, so the price won't have a chance to drop while the product is in
transit.

So certain is the plummet of prices that economists have mapped
the curve of their fall. The cost of making something — whether it is
steel, light bulbs, airplanes, flower pots, insurance policies, or bread —

Follow the Free / 51

will drop over time as a function of the cumulative number of units pro-
duced. The more an industry makes, the better it learns how to make
them, the more the cost drops. The downward price curve, propelled by
organizational learning, is sometimes called the learning curve. Although
it varies slightly in each industry, generally doubling the total output of
something will reduce the unit cost on average by 20%.

Smart companies will anticipate this learning curve. Very smart
companies will accelerate it by increasing volumes, one way or another.
Since increasing returns can exponentially expand the demand of items —
doubling their totals in months — network effects speed the steep fall of
prices.

Computer chips further compound the learning curve. Better chips
lower the cost of all manufactured goods, including new chips. Engi-
neers use the virtues of computers to directly and indirectly create the
next improved version of computers, quickening the rate at which chips
are made, and their prices drop, which speed the rate at which all goods
become cheaper. Around a circle the virtues go.

Feedback loops saturate networks. Since so many people and ma-
chines are interlinked in overlapping feedback loops, virtuous circles
form. One, two, three, four, it all adds up to more.

■ Expanding knowledge makes computers smarter.

■ As computers get smarter we transfer some of that intelligence to the
production line, lowering costs of goods and raising their perfection —
including chips.

■ Cheaper chips lower the cost of setting up a competing enterprise,
so competition and spreading knowledge lowers the prices yet more.

■The know-how of cheapness spreads throughout industry quickly
and makes its way back to the creation of better/cheaper chip and com-
munication tools.

That virtuous circle feeds itself voraciously. So potent is compound-
ing chip power that everything it touches — cars, clothes, food — falls
under its spell. Prices dip and quality rises in all goods; not mildly, but
precipitously. For example, between 1971 and 1989 a standard 17-cubic
foot refrigerator declined in price by a third (in real dollars) while be-

52 / New Rules for the New Economy

coming 27% more energy efficient and sporting more features, such as
ice-making. In 1988 Radio Shack listed a cellular phone for $1,500. Ten
years later they list a better one for $200.

Most of the increase in value we've seen in products comes from the
power of the chip. But in the network economy, shrinking chip meets
exploding net to create wealth. Just as we leveraged compounded learn-
ing in creating the microprocessor revolution, we are leveraging the
same amplifying loops in creating the global communications revolu-
tion. We can now harness the virtues of networked communications to
directly and indirectly create better versions of networked communica-
tions. When quality feeds on itself in such a manner, we witness discon-
tinuous change: in this case, a new economy.

Almost from their birth in 1971, microprocessors experienced steep
inverted pricing. The chip's pricing plunge is called Moore's Law, af-
ter Gordon Moore, the Intel engineer who first observed the amaz-
ing, steady increase in computer power per dollar. Moore's Law states
that computer chips are halving in price, or doubling in power every 18
months. Now, telecommunications is about to experience the kind of
plunge that microprocessor chips have taken — but even more drasti-
cally. The net's curve is called Gilder's Law, for George Gilder, a radical
technotheorist, who forecasts that for the foreseeable future (the next
10 years), the total bandwidth of communication systems will triple ev-
ery 12 months.

The conjunction of escalating communication power with shrink-
ing size of jelly bean nodes at collapsing prices leads Gilder to speak
of bandwidth becoming free. What he means is that the price per bit
transmitted drops down toward the free. What he does not mean is
that telecom bills drop to zero. Telecom payments are likely to remain
steady per month in real dollars as we consume more bits, just as those
bits sink in cost.

The cost per bit sinks so low, however, that the per unit cost to the
consumer closes in on the free. The cost follows what is called an as-
ymptotic curve. In an asymptotic curve the price point forever nears
zero without ever reaching it. It is like Zeno's tortoise: with each step
forward, the tortoise gets halfway closer to the limit but never actually
crosses it. The trajectory of an asymptotic curve is similar. It so closely
parallels the bottom limit of free that it behaves as if it is free.

Follow the Free / 53

Because prices move inexorably toward the free, the best move in
the network economy is to anticipate this cheapness.

So reliable is the arrival of cheapness in the new economy that a per-
son can make a fortune anticipating it. One of the classic tales of count-
ing on the cheap comes from the information era's Big Bang — when
the semiconductor transistor was born.

In the early 1960s Robert Noyce and his partner Jerry Sanders —
founders of Fairchild Semiconductor — were selling an early transistor,
called the 1211, to the military. Each transistor cost Noyce $100 to make.
Fairchild wanted to sell the transistor to RCA for use in their UHF tuner.
At the time RCA was using fancy vacuum tubes, which cost only $1.05
each. Noyce and Sanders put their faith in the inverted pricing of the
learning curve. They knew that as the volume of production increased,
the cost of the transistor would go down, even a hundredfold. But to
make their first commercial sale they need to get the price down imme-
diately, with zero volume. So they boldly anticipated the cheap by cut-
ting the price of the 1211 to $1.05, right from the start, before they knew
how to do it. "We were going to make the chips in a factory we hadn't
built, using a process we hadn't yet developed, but the bottom line: We
were out there the next week quoting $1.05," Sanders later recalled.
"We were selling into the future." And they succeeded. By anticipating
the cheap, they made their goal of $1.05, took 90% of the UHF market
share, and then within two years cut the price of the 1211 to 50 cents,
and still made a profit.

In the network economy, chips and bandwidth are not the only
things headed toward the asymptotic free. Calculation is too. The cost of
computation — as measured by the millions of calculations per second
per dollar — is headed toward the free. Transaction costs also dive toward
thefree. Information itself — headlinesand stockquotes — plunges toward
the free, too. Real-time stock quotes, for instance, were once high-priced
insider information. Lately they have become so widely available that
they must conform to a stock quote "spec" so that generic web brows-
ers can read them uniformly.

54 / New Rules for the New Economy

Indeed, all items that can be copied, both tangible and intangible,
adhere to the law of inverted pricing and become cheaper as they
improve.

While it is true that automobiles will never be free, the cost per mile
of driving will dip toward the free. It is the function (moving the body)
per dollar that continues to drop. This distinction is important. Because
while the function costs head toward zero, the expenditure share can
remain steady, or even balloon. With cheaper costs we travel more, way
more. With cheaper computation we consume billions of more calcula-
tions. Yet for vendors to make a profit, they must anticipate this cheap-
ening per unit.

Let's take communications. All-you-can-use plain old telephone ser-

Gilder's Law says that the cost
per communication bit will
begin to sink farther than it has
fallen previously. Eventually the
cost of a telephone call, or of a
bit transmitted, will be "free."

vice with no frills will soon be essentially free. But as customers use more
of this nearly free service, they quickly add options and deluxe services.
First, every room gets a phone line. Then your car gets a line, or two.
Then you get a mobile line. Then everyone in the family gets a mobile.
Then answering service. Then call forwarding, call waiting, caller ID. Then
fax and modem lines. Then all appliances and objects get a line. Then
continuous open lines to cash registers, and credit card readers. Then
security lines. Then ISDN and ADSL lines. Then caller ID blocking. Then
junk call blocking. Then vanity phone numbers. Then portable personal
numbers. Then voice mail sorting.

The outer boundaries of telephony keep expanding. When the phone
was first invented, there was much confusion about what in the world it
was good for commercially. Some thought it would be used to transmit

Follow the Free / 55

music into homes. But even the most ambitious booster didn't envi-
sion having five phones lines in their home (as I do). The desire to have
a phone in a car and to have caller ID was manufactured, indirectly, by
the technology itself.

Technology creates an opportunity for a demand, and then fills it.

This is a very different notion of supply and demand from the one
diagrammed in the introductory chapters of any economics textbook.
The traditional supply and demand curve conveys a simple lesson: As a
resource is consumed, it becomes more expensive to produce. For in-
stance, as gold is mined, the easy (cheap) nuggets are found first; but to
mine little particles of gold out of 25 tons of rock requires a higher gold
price to make the effort worthwhile. Therefore, the supply curve slopes
up, with the potential supply increasing as the price goes up. In con-
trast, the traditional understanding of demand says that demand slacks
off the more supply there is. If you have lobster on Monday, Tuesday,
and Wednesday, you'll be less interested in having it again and more in-
clined to pay less for lobster on Thursday. Therefore, the demand curve
slopes down, with prices dropping as a product becomes abundant.

In the new order, as the law of plentitude kicks in and the nearly free
take over, both of these curves are turned upside down. Paul Krugman,

In textbook economics the
supply of products would only
increase if their price went
up; in the new economics the
supply increases as price goes
down.

an economist at MIT, says that you can reduce the entire idea of the
network economy down to the observation that "in the Network Econ-
omy, supply curves slope down instead of up and demand curves slope
up instead of down." The more a resource is used, the more demand

56 / New Rules for the New Economy

there is for it. A similar inversion happens on the supply side. Because
of compounded learning, the more we create something, the easier it
becomes to create more of it. The classic textbook graph is inverted.

As the supply curve rockets upward exponentially and the demand
curve plunges further, the new Supply/Demand Flip suggests the two
curves will cross each other at lower and lower price points. We see this
already as the prices of goods and services keep heading toward the
free. But hidden between the curves is a momentous surprise. Supply
and demand are no longer driven by resource scarcity and human de-
sire. Now both are driven by one, single exploding force: technology.

The accelerating expansion of knowledge and technology simulta-
neously pushes up the demand curve while pushing down the supply
curve. One very potent force shifts both sides.

The effectiveness of technology in driving down prices is easy to ap-
preciate. As stated at the beginning of this chapter, price drops have
been going on for a while, although now it is accelerating. We know the
outcome of this trend: lower prices everywhere. Consumers rejoice. But
how are companies to make a profit in a world of constantly sinking
prices? In the supply. Technology and knowledge are driving up demand
faster than it is driving down prices. And demand, unlike prices, has no
asymptote to limit it. The extent of human needs and desires is limited
only by human imagination, which means, in practical terms, there is
no limit. The quicker the price of transportation drops, the more qual-
ity and services and innovation are embedded into cars, planes, and
trains, lifting the quality of the "wants" they satisfy.

Anything that can be replicated
will have a price that will tend
toward zero, or free. While the
cost may never reach free, it
approaches the free in a curve
called an asymptote.

Follow the Free / 57

Over time, any product is on a one-way trip over the cliff of inverted
pricing and down the curve toward the free. As the network economy
catches up to all manufactured items — from cell phones to sofas — they
will all slide down this slope of decreasing price more rapidly than ever.

The task, then, is to create new things to send down the slide — in
short, to invent items and services faster than they are commoditized.

This is easier to do in a network-based economy because the criss-
crossing of ideas, the hyperlinking of relationships, the agility of alli-
ances, and the nimble quickness with which new nodes are created all
support the constant generation of new goods and services.

We will create artifacts and services rapidly, as if they were short-
lived bubbles. Since we can't hold back a bubble's drift toward popping,
we can only learn to make more bubbles, faster.

If goods and services become more valuable as they become more
plentiful, and if they become cheaper as they become valuable, then the
natural extension of this logic says that the most valuable things of all
should be those that are ubiquitous and free.

Ubiquity drives increasing returns in the network economy. The
question becomes, What is the most cost-effective way to achieve ubiq-
uity? And the answer is: give things away. Make them free.

Indeed, we see many innovative companies in the new economy fol-
lowing the free. Microsoft gives away its Internet Explorer web browser.
Netscape also gives away its browser, as well as its valuable source
code. Qualcomm, which produces Eudora, the popular email program,
is given away as freeware in order to sell upgraded versions. Thomson,
the $8 billion-a-year publisher, is giving away its precious high-priced
financial data to investors on the web. Some one million copies of
McAfee's antivirus software are distributed free each month. And, of
course, Sun passed Java out gratis, sending its stock up and launching
a mini-industry of Java application developers.

Can you imagine a young executive in the 1940s telling the board
that his latest idea is to give away the first 40 million copies of his only
product? (Fifty years later that's what Netscape did.) He would not have

58 / New Rules for the New Economy

lasted a New York minute.

But now, giving away a product is a tested, level-headed strategy
that banks on the network's new rules. Because compounding network
knowledge inverts prices, the marginal cost of an additional copy (in-
tangible or tangible) is near zero. It cost Netscape $30 million to ship
the first copy of Navigator out the door, but it cost them only $1 to ship
the second one. Yet because each additional copy of Navigator sold in-
creases the value of all the previous copies, and because the more value
the copies accrue, the more desirable they become, it makes a weird
kind of economic sense to give them away at first. Once the product's
worth and indispensability is established, the company sells auxiliary
services or upgrades, continuing its generosity to involve more custom-
ers in a virtuous circle.

One might argue that this frightening dynamic works only with soft-
ware, since the marginal cost of an additional copy is already near zero
(now that software can be distributed online). But "following the free"
is a universal law. Hardware, when networked, also follows this man-
date. Cellular phones are given away in order to sell cell phone services.
We can expect Direct-TV dishes to be given away for the same reasons.
This principle applies to any object whose diminishing cost of replica-
tion is exceeded by the advantages of being plugged in.

As crackpot as it sounds, in the distant future nearly everything we
make will (at least for a short while) be given away free — refrigerators,
skis, laser projectors, clothes, you name it. This will only make sense
when these items are pumped full of chips and network nodes, and
thus capable of delivering network value.

The natural question is how companies are to survive in a world of
such generosity? Three points will help.

First, think of "free" as a design goal for pricing. There is a drive
toward the free — the asymptotic free — that, even if not reached, makes
the system behave as if it has been reached. A very cheap rate can have
an effect equivalent to being outright free.

Second, pricing a core product as free positions other services to be
expensive. Thus, Sun gives Java away to help sell servers, and Netscape
hands out consumer browsers to help sell commercial server software.

Third, and most important, following the free is a way to rehearse a
service's or a good's eventual fall to free. You structure your business

Follow the Free / 59

as if the thing that you are creating is free in anticipation of where its
price is going. Thus, while Sega game consoles are not free to consum-
ers, they are sold as loss leaders to accelerate their journey toward their
eventual destiny — to be given away in a network economy.
Another way to view this effect is in terms of attention:

The only factor becoming scarce in a world of abundance is
human attention.

As Nobel-winning economist Herbert Simon puts it: "What infor-
mation consumes is rather obvious: It consumes the attention of its re-
cipients. Hence a wealth of information creates a poverty of attention."
Each human has an absolute limit of 24 hours per day to provide atten-
tion to the millions of innovations and opportunities thrown up by the
economy. Giving stuff away captures human attention, or mind share,
which then leads to market share.

Following the free also works in the other direction. If one way to
increase product value is to make products free, then many things now
free may contain potential value not yet perceived. We can anticipate
the eruption of new wealth on the frontier by tracking down the free.

In the web's early days, the first indexes to this uncharted territory
were written by students and given away. The indexes helped people
focus their attention on a few sites out of the thousands available.
Webmasters, hoping to draw attention to their sites, aided the index-
ers' efforts. Because they were free, indexes became ubiquitous. Their
ubiquity quickly made them valuable (and their stockholders rich) and
enabled many other web services to flourish.

What is free now that may later lead to extreme value? Where to-
day is generosity preceding wealth? A short list of online candidates
would be digesters, guides, catalogers, FAQs, remote live cameras,
front page web splashes, and numerous bots. Free for now, each of
these will someday have profitable companies built around them sell-
ing auxiliary services. Digesting, guiding and cataloging are not fringe
functions, either. In the industrial age, a digest, Reader's Digest, was the
world's most widely read magazine; a guide, TV Guide, was more profit-
able than the three major networks it guided viewers to; and a catalog
of answers, the Encyclopaedia Britannica, began as a compendium of

60 / New Rules for the New Economy

articles written by amateurs — something like online FAQs (Frequently
Asked Questions).

But the migration from ad hoc use to commercialization cannot be
rushed. To reach ubiquity you need to pass through sharing.

Increasingly we see technologies pass through a protocommercial
stage. Huge numbers of people, exerting millions of hours of collective
effort, will jointly craft hundreds of thousands of creations, but with-
out the exchange of money. An entire society following the free! Author
Lewis Hyde long ago called this arrangement a gift economy. The central
task in a gift economy is to keep the gifts moving. By social debt, barter,
and pure charity, gifts circulate and generate happiness and wealth.

The early internet and the early web sported amazingly robust gift
economies. Text and expertise (FAQs, for example) and services (page
designs) were swapped, shared generously, or donated outright. Infor-
mation was bartered, content was given away, code was exchanged. For
a long while the gift economy was the only way to acquire things on-
line. In the first 1,000 days of the web's life, several hundred thousand
webmasters created over 450,000 web sites, thousands of virtual com-
munities, and 150 million pages of intellectual property, primarily for
free. And these protocommercial sites were visited by 30 million people
around the world, with 50% of them visiting daily, staying for an average
of to minutes per day. This is a raging success by almost any measure
you'd want to use. No other emerging media in the past experienced
such glory so early in its growth.

Talk of generosity, of information that wants to be free, and of virtual
communities is often dismissed by businesspeople as youthful new age
idealism. It may be idealistic but it is also the only sane way to launch a
commercial economy in the emerging space. "The web's lack of an ob-
vious business model right now is actually its main event," says Stewart
Brand, of the Global Business Network.

When a sector of the new economy passes through the protocom-
mercial phase, it is the opposite of the "tragedy of the commons." The
tragedy of the commons was that nobody took responsibility for main-
taining the communal pastures that were the livelihood for the entire
community. In the follow-the-free economy that seems to precede com-

Follow the Free / 61

mercial activity on the net, everyone keeps the commons up because
nobody is able to make a living from it on their own. Sophisticated soft-
ware, as good as anything you can purchase, is written, debugged, sup-
ported, and revised for free in this "triumph of the commons."

The most popular software used to run web sites is called Apache. It
is not sold by Netscape, or Microsoft, or anyone. Apache, which has 47%
of the server market (Microsoft has 22% and Netscape 10%), was writ-
ten (and is maintained) by a network of volunteers. It is given away free.
Apache, which is used by the developers of such commercial sites as
McDonald's, keeps getting better because the triumph of the commons
rewards a completely open product: Anyone has access to Apache's
software source code and can improve it. "If you give everyone source
code, everyone becomes your engineer," says John Gage, chief scientist
at Sun Microsystems.

The most popular operating system for web server workstations is
not sold by anyone. It is a product called Linux, a Unix-compatible pro-
gram that was originally written by Linus Torvalds, and given away for
free. In the manner of building medieval cathedrals, hundreds of soft-
ware engineers volunteer their time and expertise to refine and improve
Linux, and to keep it free. Beside Apache and Linux, there are many
other free software suites, such as Perl and X-Windows, maintained
by a network of programmers. The engineers don't get paid in money;
rather they get better tools than they can buy, tools that can be eas-
ily tweaked by them for maximum performance, tools superior to what
they can make alone, and tools that increase in network value, since
they are given away.

Tens of thousands of software programs written for almost every
imaginable use are available on the net for free. Called shareware, the
model is simple. Download whatever software you want for free, try it
out, and if you like it, send some money to the author. Dozens of en-
trepreneurs have made their million dollars selling goods by this pro-
tocommercial method. More and more, the triumph of the commons
overrides orthodox business models.

As Stewart Brand says, the main event of the emerging World Wide
Web is its current absence of a business model in the midst of astound-
ing abundance. The gift economy is one way players in the net rehearse
for a life offol lowing the free and anticipating the cheap. This is also a way

62 / New Rules for the New Economy

for entirely new business models to shake out. Furthermore the pro-
tocommercial stage is a way for innovation to fast-forward into hyper-
drive. Temporarily unhinged from the constraints of having to make
a profit by next quarter, the greater network can explore a universe of
never-before-tried ideas. Some ideas will even survive the transplanta-
tion to a working business.

It's a rare (and foolish) software outfit these days that does not in-
troduce its wares into the free economy as a beta version in some fash-
ion. Fifty years ago the notion of releasing a product unfinished — with
the intention that the users would help complete it — would have been
considered either cowardly, cheap, or inept. But in the new regime, this
precommercial stage is brave, prudent, and vital.

Releasing incomplete "buggy" products is not cost-cutting des-
peration; it is the shrewdest way to complete a product when your
customers are smarter than you are.

The protocommercial state and the triumph of the commons is in
ascendance. It is no coincidence that increasing numbers of internet
companies take themselves public before they are profitable. Investors
are purchasing shares in a firm with protocommercial value. The old
guard reads this as a signal of greed, speculation, and hype. But it also
signals that many of the components of the gift economy — attention,
community, standards, and shared intelligence — have to be in place
before cold-cash commercialization can kick in. The gift economy is a
rehearsal for the radical dynamics of the network economy.

Strategies

What can you give away? This is the most powerful question in this
book. You can approach this question in two ways: What is the closest
you can come to making something free, without actually pricing it at
zero? Or, in a true gesture of enlightened generosity, you can figure out
how to part with something very valuable for no monetary return at all.
If either strategy is pursued with intelligence, the result will be the same.
The network will magnify the value of the gift. But giving something

Follow the Free / 63

away is not usually easy. It must be the right gift, given in the proper
context. To figure out what to give away, consider these questions:

■ Is the freebie more than a silly premium, like the toy in a cereal
box? There is no power in the gift unless it is crucial to your business.

■ What virtuous circle will this freebie circulate in? Is it the loop you
most need to amplify?

■In the long run, the unbounded support of a customer is more
valuable than a fixed amount of their money. How will you eventually
capture the support of customers if there is initially no flow of money?

Every organization harbors at least one creation — or potential
creation — that can be liberated into "free-dom." This is often an idea
with problems, particularly with its price: Should it be $69.50 per min-
ute or $6.50 per box? The answer sometimes is: It should be free. Even
if the idea is never actualized, my experience is that the very act of con-
templating the free will inevitably illuminate all kinds of beneficial attri-
butes that were never visible before. "Free" has long been a taboo price
point. Perhaps because it has been forbidden, many low-hanging fruit
are waiting to be plucked by giving the free serious consideration.

Act as //your product or service is free. Magazine publishers do
this. The cover price on a magazine barely covers the cost of printing
it, so publishers act as if they were giving it away (and some actually
do). They make their money instead on advertising. Says pundit Esther
Dyson, "The creator who immediately writes off the costs of developing
content — as if it were valueless — is always going to win over the creator
who can't figure out how to cover those costs." Memberships in serious
discounters such as Cendant are also "as if free." Cendant "gives away"
the merchandise very near the cost of manufacturing, as if the stuff were
free. They make the bulk of their profits not from selling goods to its
members — who get fantastic retail prices — but from selling $40 per
year membership fees.

Invest in the first copy. That is the only one that will hurt. The
second copy and all thereafter will head toward the free, but the first
will become increasingly more expensive and capital intensive. Gordon
Moore, of Moore's Law fame, posed a second law: that the costs of in-
venting chips (that are halving in cost every 18 months) is doubling every

64 / New Rules for the New Economy

three to four years. The up-front investment for research, design, and pro-
cess invention for all complex endeavors are commanding a larger share
of the budget, while the capital costs of subsequent copies diminishes.

Anticipate the cheap. What would you do if your current offerings
cost only one third what they cost today? They will someday soon, so
create models that recognize this trend.

Turn off the meter, charge for joining. Flat or monthly fixed pricing
is one way of pricing "as if free." Fees are paid, but there is no meter
running. This tactic can be abused by the company (a la cable TV) or
can be abused by the consumer (a la AOL). A flat fee is one type of sub-
scription. Subscriptions are well-honed tools used by the soft world of
magazines and theater, among others. Could subscriptions really apply
to old order physical products, like say, food? The idea of subscribing
to food is not so outlandish. Forty years ago subscriptions to milk were
quite common. There were also subscriptions to bread and beer and
other staples. Subscriptions tend to emphasize and charge for intangi-
ble values: regularity, reliability, first to be served, and authenticity, and
work well in the arena of "as if free."

The ancillary market is the market. The software is free, but the man-
ual is $10,000. That's no joke. Cygnus Solutions, based in Sunnyvale,
California, rakes in $20 million per year in revenues selling support for
free Unix-like software. Apache is free but you can buy support and up-
grades from C2Net. Although Novell, the network provider, does sell
network software, that's not what they are really selling, says Esther Dy-
son: "What Novell Inc. really is selling is its certified NetWare engineers,
instructors, and administrators, and the next release of NetWare." One
educational software exec admitted that his company's help line was
actually an important profit center. Their main market was the ancillary
products they sold for their flagship software, which they had a chance
to do while helping customers.

Pinpoint where value is being given out for free now, and then follow
up. The next Netscape, the next Yahoo, the next Microsoft is already up
and running, and they are giving their stuff away for free. Find them,
and hitch your wagon to their star. Look for the following tricks: charges
only for ancillaries, as-if-free behavior, memberships, and outright gen-
erosity. If they are using the free to play off network effects, they are the
real McCoys.

5 FEED THE WEB FIRST

Members Prosper as the Net
Prospers

The distinguishing characteristic of networks is that they contain no
clear center and no clear outside boundaries. Within a network every-
thing is potentially equidistant from everything else.

Therefore the first thing the network economy reforms is our
identity.

The vital distinction between the self (us) and the nonself (them) —
once exemplified by the fierce loyalty of the organization man in the in-
dustrial era — becomes less meaningful in a network economy. The only
"inside" now is whether you are on the network or off.

Individual allegiance moves away from firms and toward networks
and network platforms.

Are you Windows or are you Mac?

This shift to network loyalty makes the potential of any network we
might want to join a key issue. Is the network waxing or waning? Is
the upside potential meager or tremendous? Is the network open or
closed?

When given the choice between closed or open systems, consumers
show a fierce enthusiasm for open architectures. They choose the open
again and again because an open system has more potential upside
than a closed one. There are more sources from which to recruit mem-
bers and more nodes with which to intersect.

66 / New Rules for the New Economy

Identifying the preferred network to do business in is now a major
chore for firms. Because more and more of a firm's future lies in its net-
works, firms must evaluate a network's relative open- and closedness,
its circulation, its ability to adapt. Consultant John Hagel says, "A web
limits risk. It allows companies to make irreversible investments in the
face of technological uncertainty. Companies in a web enjoy expanding
sourcing and distribution options, while their fixed investment and skill
requirements fall."

As the destiny of firm and web intertwine, the health of the matrix
becomes paramount.

Maximizing the value of the net itself soon becomes the number
one strategy for a firm. For instance, game companies will devote as
much energy to promoting the platform — the tangle of users, game
developers, and hardware manufacturers — as they do to their games.
For unless their web thrives, they die. This represents a momentous
change — a complete shift in orientation. Formerly, employees of a firm
focused their attention on two loci: the firm itself and the marketplace.

The prosperity of a firm is
directly linked to the prosperity
of its network. As the platform
or standard it operates on
flourishes, so does the firm.

Now there is a third horizon to consider: the network. The network
consists of subcontractors, vendors and competitors, emerging stan-
dards for exchanges, the technical infrastructure of commerce, and the
web of consumers and clients.

Commerce networks can be thought of as ecologies. Economist
Brian Arthur states: "Players compete not by locking in a product on
their own but by building webs — loose alliances of companies organized

Feed the Web First / 67

around a mini-ecology — that amplify positive feedbacks to the base
technology."

During certain phases of growth, feeding the network is as important
as feeding the firm. Some firms that already have large market shares
(such as Intel, which owns 80% of the PC processor market) channel
money, through minority investments, to younger firms whose success
will strengthen the market for their products, directly or indirectly. They
feed the web because it is good business.

In the network economy a firm's primary focus shifts from maximiz-
ing the firm's value to maximizing the network's value.

Not every network demands the same investment. The music CD
standard and web of suppliers is well entrenched by now. The new DVD
video standard is not. A publishing company issuing music on a CD has
to devote less energy to making sure the CD platform flourishes than
does a movie company issuing their film on a DVD. The film company
must devote substantial resources to ensuring the spread and survival
of this emerging platform. They'll work with the hardware manufactur-
ers, maybe share costs of advertising by seeding the platform logo in
their own ads, send reps to technical committees, and cooperate with
other film studios in getting the new format accepted. The music com-
pany doesn't need to make as heavy an investment with CDs. But they
do need to make investments into new networks if they try to deliver
music online — because online delivery is still in its embryonic phase.

Every network technology follows a natural life cycle, roughly broken
into three stages:

■ Prestandard

■ Fluid

■ Embedded

A firm's strategy will depend on what phase a network is in.

The prestandard phase is the most exciting. This period is marked
by tremendous innovation, high hopes, and grand ambition. "Aha!"
ideas flow readily. Since there are no experts, everyone can compete,
and it seems as if everyone does. Easy entry into the field draws myriad

68 / New Rules for the New Economy

players. For instance, when telephone networks began, there were few
standards and many contenders. In 1899, there were 2,000 local tele-
phone firms in the American telephone network, many of them run-
ning with their own standards of transmission. In a similar vein, in the
1890s, electricity came in a variety of voltages and frequencies. Each
local power plant chose one of many competing standards for electri-
cal power. Transportation networks, ditto. As late in the railroad era as
1880, thousands of railway companies did not share a universal gauge.

Two examples of networks in the prestandard stage today are online
video and e-money. You have the choice of many competing protocols
with equal prospects. With both domains, the uncertainty level is high,
but the consequences of being wrong are minimal. Little is locked in, so
it's easy to change.

Networks in the fluid phase have a different dynamic. The plethora
of choices in the prestandard phase gradually reduces to two or three.
Allegiances are mobile, and drift over time. During this period, net-
works demand the strongest commitment to their survival. Participants
have to feed the web of their choice first, and the narrowing of choices
allows substantial investment to spur rapid growth. The effects of plen-
titude and increasing returns kick in — more breeds more. Feeding the
web on any of several standards still produces gains for all participants.
Yet it is inevitable that only one standard will ultimately prevail while
the other ones fail. The uncertainty level is nearly as high as during the
prestandard phase, but the risks for being wrong are greater. Anyone
who remembers the demise of 8-track audiotapes will appreciate the
perils of this painful stage. Today such networks as digital photographs
and desktop operating systems are in this fluid phase: Several well-es-
tablished standards vie for ultimate dominance. Choose wisely!

The final stage in the life cycle of networks is the embedded phase,
where one standard is so widely accepted that it becomes embedded
in the fabric of the technology and is thereafter nearly impossible to
dislodge — at least as long as the network exists. Regular no-volt AC
power is well embedded at this point (although, as the power grid be-
comes global, there could be some surprises). ASCII text is likewise
deeply embedded — at least for phonetic languages. Some of the con-
ventions of voice dial tone are so ubiquitous worldwide as to be perma-
nent.

Feed the Web First / 69

In any phase of innovation — prestandard, fluid, or embedded —
standards are valuable because they hasten innovation. Agreements are
constraints on uncertainty. The constraints of a standard solidify one
pathway out of many, allowing further innovation and evolution to ac-
celerate along that stable route. So central is the need to cultivate cer-
tainty that organizations must make the common standard their first
allegiance. As standards are established, growth takes off.

For maximum prosperity, feed the web first.

Arriving at standards is often easier said than done. Standard-mak-
ing is a torturous, bickering process every time. And the end result is
universally condemned — since it is the child of compromise. But for a
standard to be effective, its adoption must be voluntary. There must be
room to dissent by pursuing alternative standards at any time.

Standards play an increasingly vital role in the new economy. In the
industrial age, relatively few products demanded standards. You didn't
need a consensual network to make a chair and table. If you obeyed
some basic ergonomic conventions — make table height 30 inches — you
were on your way. Those industrial products that operated in networks —
such as the electrical or transportation networks — demanded sophisti-
cated standard-making. Anything plugged into the electrical grid had to
be standard. Automobiles manufactured by separate factories shared
standards on such things as axle width, fuel mixtures, placement of turn
signals, not to mention the many standards of road construction and
signage.

All information and communication products and services demand
extensive consensus. Participants at both ends of any conversation
have to understand each other's language. Multiply one conversation
by a billion, factor in a thousand different media choices, and then start
to count three-way, four-way, n-way conversations, and the amount of
consensus-setting skyrockets.

In the network economy, ever-less energy is needed to complete
a single transaction, but ever-more effort is needed to agree on what
pattern the transaction should follow.

70 / New Rules for the New Economy

Thus "feeding the web first" increases in necessity. Businesses can
expect to devote great intellectual capital on formulating, negotiating,
deciding, forecasting, and adhering to emerging standards. The ques-
tion "Which platform do we back?" will not be confined to PCs. It will
be asked in regard to calendars, cars, accounting principles, and even
currencies.

As more of the economy migrates to intangibles, more of the econ-
omy will require standards.

But consumers will groan under the load of decisions. There is a
ying-yang tradeoff in the new economy. The ying, or positive side, is that
consumers keep most of the gains in productivity that are earned by
technology. Competition is so severe, and transactions so "friction-
free," that most of each cycle's betterment goes not to corporate profits
but to consumers in the form of cheaper prices and higher quality.

The yang, or downside, is that consumers have a never-ending on-
slaught of decisions to make about what to buy, what standard to join,
when to upgrade or switch, and whether backward compatibility is
more important than superior performance. The fatigue of sorting out
options and allegiances, or recovering from them, is underappreciated
at the moment, but will mount. The joy of the new economy is that the
next version is almost free; the bane is that no one wants the hassle of
upgrading to it, even if you pay them to do it.

The fatigue will only worsen. The net is a possibility factory, churn-
ing out novel opportunities by the screenful. Unharnessed, this explo-
sion can drown the unprepared. Standardizing choices helps tame the
debilitating abundance of competing possibilities. This is why the most
popular sites on the web today are meta-sites that sort the abundance
and point you to the best.

Since the network economy is so new, we as a society have paid
little attention to how standards are created and how they grow. But we
should notice, because once implemented, a successful standard tends
to remain forever. And standards themselves shape behavior.

I was associated with the genesis of the Well, one of the first public
computer conferencing systems to be plugged into the internet. The
Well was conceived and built by others, but as director of the poor non-

Feed the Web First / 71

profit that owned it, and as one of the first participants to join when it
opened, I was involved in creating its policies. It became clear almost
from day one that the technical specifications of the software that the
Well used directly shaped the kind of community growing within it.
Other models of conferencing software used elsewhere produced differ-
ent kinds of communities. The Well's software — as implemented by the
Well — encouraged linear conversations and community memory; it dis-
couraged anonymity, but encouraged responsibility for words and top-
ics; it permitted limited forms of dissent and retraction, and it allowed
users to invent their own tools. It did all this primarily by means of Unix
code — by the software standards set up within the Well — rather than by
posted rules. The community it shaped was distinctive and long-lived.
In fact the community, with all its quirks, is still going, even though the
software that runs it has evolved into a web browser interface. The be-
havior-changing standards remain. The power to mold a community by
code rather than regulation was eventually articulated by Well users into
a serviceable maxim: Peace through tools, not rules.

The internet and the web also contain toolish standards that invis-
ibly shape our behavior. We have ideas about ownership, about acces-
sibility, about privacy, and about identity that are all shaped by the code
of HTML and TCP/IP, among others. Currently only a small portion of
our lives flow through these webs, but as cyberspace subsumes televi-
sionspace and phonespace and much of retailspace, the influence of
standards upon social behavior will grow.

Eventually technical standards will become as important as laws.

Laws are codified social standards; but in the future, codified techni-
cal standards will be just as important as laws. Harvard Law professor
Lawrence Lessig says, "Law is becoming irrelevant. The real locus of
regulation is going to be (computer) code." As networks mature, and
make the transition from ad hoc prestandard free-for-alls to fluid hot
spots of innovation, and then into full-fledged systems with deeply em-
bedded standards, standards increasingly ossify into something like
laws.

Standards also harden with age. They become resistant to change
and they descend into hardware. Their code gets wired into the backs

72 / New Rules for the New Economy

of chips, and as the chips spread, the standard infiltrates ever more
deeply.

An elaborate process of legal overview monitors and analyzes our
lawmaking. So far we have little of the sort for our standard-making,
although these agencies, such as the ITU (International Telecom Union)
will soon be as influential as courts. Standards are not just about tech-
nology. They are about soft and fuzzy things such as options and re-
lationships and trust. They are social instruments. They create social
territory.

A network is like a country in that it is a web of relationships regu-
lated by standards. In a country citizens pay taxes and adhere to laws
for the benefit of all. In a network, netizens feed the web first for the
benefit of all. The network economy is a meta-country. Its web of rela-
tionships differ from those of a country in three ways:

■ No geographical or temporal boundaries exist — relations flow
ceaselessly 24 by 7 by 365.

■ Relations in the network economy are more tightly coupled, more
intense, more persistent, more diverse, and more intimate in many
ways than most of those in a country.

■Multiple overlapping networks exist, with multiple overlapping
allegiances.

These hyperconnections can either strengthen or weaken traditional
relationships. The extremely personal, highly trust-bound relations in a
family stand to be strengthened, while the diffuse and nearly contrac-
tual relations in a nation-state are liable to weaken. Yet, as Peter Drucker
points out, "The nation-stare is not going to wither away. It may remain
the most powerful political organ around for a long time to come, but it
will no longer be the indispensable one." In its stead we'll rely on non-
governmental agencies such as the Red Cross, ACLU, HMOs, insurance
giants, the net and the web, and UN-like entities. These parapolitical
organizations will supplement the embedded nation-state. They will be
the indispensable networks we care about.

In both country and network, the surest route to raising one's own
prosperity is raising the system's prosperity. The one clear effect of the
industrial age is that the prosperity individuals achieve is more closely

Feed the Web First / 73

related to their nation's prosperity than to their own efforts. Lester Thu-
row, an MIT economist, has pointed out that enabling the lowest paid
to earn more is the best way to raise wages for the highest paid — the
theory being that a rising tide lifts all boats. The network economy will
only amplify this.

To raise your product, lift the networks it ties into. To raise your com-
pany, lift the standards it supports. To raise your country, increase the
connections (in quality and quantity) that allow others to prosper.

To prosper, feed the web first.

The web is underfed right now. It is small compared to the rest of
the world. In 1998 the internet boasted of an estimated 120 million peo-
ple with access. But that means only 2% of human adults have a direct
line to the online network.

But the net is growing exponentially fast. If current rates continue, by
early in the new century, 1 billion people will have internet access, 75%
of adults will access to some kind of phone, and, according to Nicholas
Negroponte, there will 10 billion electronic objects connected together
online. Every year the net engulfs more of the world.

The net is moving irreversibly to include everything of the world.

As the net takes over, many observers have noted the gradual dis-
placement in our economy of materials by information. Automobiles
weigh less than they once did and yet perform better. Industrial materials
have been replaced by nearly weightless high-tech know-how in the form

Even industrial objects like
automobiles follow new rules.
An automobile's average
weight is dropping and will
continue to drop as information
replaces its mass.

74 / New Rules for the New Economy

of plastics and composite fiber materials. Stationary objects are gain-
ing information and losing mass, too. Because of improved materials,
high-tech construction methods, and smarter office equipment, new
buildings today weigh less than comparable ones from the 1950s. So it
isn't only your radio that is shrinking, the entire economy is losing
weight too.

Even when mass is conserved, information increases. An average
piece of steel manufactured in 1998 was vastly different from an av-
erage piece of steel made in 1950. Both pieces weighed approximately
the same, but the one made recently is far superior in performance be-
cause of the amount of design, research, and knowledge that went into
its creation. Its superior value is not due to extra atoms, but to extra
information.

The wholesale migration from mass to bits began with the arrival
of computer chips. This subtle disembodiment was first viewed as a
unique dynamic of the high-tech corridors of Silicon Valley. Software
was so strange — part body, part spirit — that nobody was surprised
when the computer industry itself behaved strangely. The principles of
the net, such as increasing returns, were seen as special cases, anom-
alies within the larger "real" economy of steel, oil, automobiles, and
farms. What did such weirdness have to do with, say, making cars, or
selling lettuce? At first, nothing. But by now every industry (shoe retail,
glass manufacturing, hamburgers) has an information component, and
that component is increasing. There is not a single company of conse-
quence that does not use computers and communication technology.
All U.S. companies (low as well as high-tech) together spent $212 bil-
lion on information technology in 1996. Often, the digital component
of the firm, say the IT or MIS department, or the wizards running the
technology, will be the first to feel the influence of the new rules and net-
work dynamics. Consultants Larry Downes and Chunka Mui say, "Even
though the primary technology of many industries may not be in transi-
tion . . . every industry is going through a revolution in its information
technology." As more of a company "goes online" nerd ideas begin to
seep into the whole organization, reshaping the firm's understanding
of what it is doing. Over time, more and more employees will chase the
opportunities that intensive information and communication networks
bring.

Feed the Web First / 75

New network technology and globalization accelerates the disem-
bodiment of goods and services. The new dynamics of information will
gradually supersede the old dynamics of industrialization until network
behavior becomes the entire economy.

Bit by bit, the logic of the network will overtake every atom we deal
with.

The logic of the network will spread from its base in silicon chips,
to infiltrate steel, plywood, chemical dyes, and potato chips. All manu-
facturing, whether seeded with silicon wafers or not, will respond to
network principles.

Consider oil — the quintessential atom-based resource. The classi-
cal theory of diminishing returns was practically invented to explain the
oil industry. Easy oil is extracted cheaply at first; then at a certain point
the expense of extraction doesn't justify the cost unless the price goes
up. But by now the oil industry is so invaded by chip technology that
it is beginning to obey the laws of the new economy. Sophisticated 3D
viewing software allows geologists to map oil-yielding layers to within
a few meters; computer-guided flexible drills can burrow sideways with
precision, reaching small pockets of oil. Superior pumps extract more
oil with less energy and maintenance. Diminishing returns are halted.
The oil flows steadily at steady prices, as the oil industry slides into the
new economy.

And what could be more industrial-age than automobiles? Yet, chips
and networks can take the industrial age out of cars, too. Most of the
energy a car consumes is used to move the car itself, not the passenger.
So if the car's body and engine can be diminished in size, less power is
needed to move the car, meaning the engine can be made yet smaller.
A smaller engine requires a yet smaller engine, and so on down the
slide of compounded value that microprocessors followed. The car's
body can be reduced substantially using smart materials — stuff that re-
quires increasing knowledge to invent and make — which in turn means
a smaller, more efficient engine can power it.

Detroit and Japan have designed cars that weigh only 500 kilograms.
Built out of ultra-lightweight composite fiber material, these prototypes
are powered by high-tech hybrid engine motors. They reduce the mass

76 / New Rules for the New Economy

of radiator, axle, and driveshaft by substituting networked chips. They in-
sert chips to let the car self-diagnose its performance, in real time. They
put chips in brakes, making them less likely to skid. They put micropro-
cessors in the dashboard to ease navigation and optimize fuel use. They
use hydrogen fuel cells that do not pollute, and electric motors with
low noise pollution. And just as embedding chips in brakes made them
better, these lightweight cars will be wired with network intelligence to
make them safer: A crash will inflate intelligent multiple air bags — think
"smart bubblepak."

The accumulated effect of this substitution of knowledge for mate-
rial in automobiles is what energy visionary Amory Lovins, director of
the Rocky Mountain Institute, calls a hypercar: an automobile that will
be safer than today's car, yet can cross the continental United States on
one tank of hydrogen fuel.

Already, the typical car boasts more computing power than your typ-
ical desktop PC. Already the electronics in a car cost more ($728) than
the steel in the car ($675). But what the hypercar promises, says Lovins,
is a car remade by silicon. A hypercar can be viewed as step toward a
vehicle that is (and behaves like) a solid state module. A car becomes
not wheels with chips, but a chip with wheels. And this chip with wheels
will drive on a road system increasingly wired as a decentralized elec-
tronic network obeying the network economy's laws as well.

Once we visualize cars as chips with wheels, it's easier to imagine air-
planes as chips with wings, farms as chips with soil, houses as chips with
inhabitants. Yes, they will have mass, but that mass will be subjugated
by the overwhelming amount of knowledge and information flowing
through it. In economic terms, these objects will behave as if they had
no mass at all. In that way, they migrate to the network economy.

Because information trumps mass, all commerce migrates to the
network economy.

MIT Media Lab director Nicholas Negroponte guesstimates that
the online economy will have reached $1 trillion by 2000. Most tenured
economists think that figure is terribly optimistic. But actually that op-
timistic figure is terribly underestimated. It doesn't anticipate the scale
on which the economic world will move on to the internet as the net-

Feed the Web First / 77

work economy infiltrates cars and traffic and steel and corn. Even if all
cars aren't sold online immediately, the way cars are designed, man-
ufactured, built, and operated will depend on network logic and chip
power.

The current concern about the size of the online market will have di-
minishing relevance, because all commerce is jumping on to the inter-
net. The distinctions between the network economy and the industrial
economy will likewise blur and fade, as all economic activity is touched
in some way by network rules. The key distinction remaining will be be-
tween the animated versus the inert.

The realm of the inert encompasses any object that is divorced from
its economic information. A head of lettuce today for instance does not
contain any financial information beyond a price sticker. Once applied,
that price is fixed, too. It doesn't change unless a human changes it.
The economic consequences of lettuce sales elsewhere, or a change in
the general global economy do not affect the head of lettuce itself. In-
stead, lettuce-related information flows through wholly separate chan-
nels — news programs or business newsletters — that are divorced from
the lettuce itself. The lettuce is economically inert.

The realm of the animated is different. It's vastly interconnected. In
this coming world a head of lettuce carries its own identity and price,
displayed perhaps on an LED slab nearby, or on a disposable chip at-
tached to its stem. The price changes as the lettuce ages, as lettuce
down the street is discounted, as the weather in California changes, as
the dollar surges in relation to the Mexican peso. Traders back in su-
permarket headquarters manage the "yield" of lettuce prices using the
same algorithms that airlines use to maximize their profits from airline
seats. (An unsold seat on a 747 is as perishable as an unsold head of
lettuce.) In relation to the net, the lettuce is animated. It is dynamic,
adaptive, and interacting with events. A river of money and information
flows through it. And if money and information flow through some-
thing, then it's part of the network economy.

The progression by which the old economy migrates toward the new
follows a relentless logic:

■ Increasing numbers of inert objects are animated by information
networks.

78 / New Rules for the New Economy

■Once the inert is touched by a network, it obeys the rules of
information.

■ Networks don't retreat; they tend to multiply into new territories.

■ Eventually all objects and transactions will run by network logic.

One is tempted to add "resistance is futile." The overwhelming
long-term trend toward universal connection may seem Borg-like, as if
all things will lose their identity and become part of one large mindless
swarm. Two things should be made clear: 1) constant, ubiquitous con-
nections do not per se eliminate individuality; and 2) by "all" I mean an
ongoing trend that approaches an asymptote, not a finality.

One might say that industrialization eradicated hand-crafted pro-
duction to the point where all objects are machine-made. That is true
by and large, and it accurately describes the destination of a trend. But
the trend has a few notable exceptions. In an era of objects made com-
pletely by machines, hand-made items are a scarcity and thus com-
mand very high prices. A few — but only a few — shrewd artisans and
entrepreneurs can make a living crafting items by hand, items such as
bicycles, furniture, guitars, that would ordinarily be stamped out in a
factory. Resistance is marginal, but profitable.

The same will be true in the networking of the economy. Resistance
will not be futile. In a world of ubiquitous connection, where everything
is connected to everything else, scarce will be the person not connected
at all, or the company not pushing ideas and intangibles. If these mav-
ericks are able to interface with the networked economy without los-
ing their distinctivness or value, then they will be sought out, and their
products priced high. One can imagine a successful idea-artist in the
year 2005 who does no email, no phone, no videoconferences, no VR,
no books, and who does not travel. The only way to get her fabulous
ideas is in person, face-to-face at her hideout, live. The fact that she is
booked 8 months in advance only adds to her reputation.

MIT economist Paul Krugman has an alternative vision of how infor-
mation technology will invert the expected order. He writes: "The time
may come when most tax lawyers are replaced by expert systems soft-
ware, but human beings are still needed — and well paid — for such truly
difficult occupations as gardening, house cleaning, and the thousands

Feed the Web First / 79

of other services that will receive an ever-growing share of our expen-
diture as mere consumer goods become steadily cheaper." Actually we
don't need to wait for the future. Recently I had to hire two different
freelancers. One sat in her office moving symbols around. She tran-
scribes tape-recorded interviews and charges $25 per hour. The other is
a guy who works out of his home repairing greasy kitchen appliances.
He charges $50 per hour, and as far as I could tell had more business of
the two. Krugman's argument is that these "manual crafts" (as they are
bound to be labeled when so high-priced) will level the salary discrep-
ancies that now exist between high tech and low tech occupations.

My argument is that great gardeners will be high-priced not only be-
cause they are scarce and exceptions, but also because they, like every-
one else, will be using technology to eliminate as much of the tedious
repetitive work as possible, leaving them time to do what humans are
so good at: working with the irregular and unexpected.

At the dawn of the industrial age it would have been difficult to imag-
ine how such quintessential agrarian jobs as farming, husbandry, and
forestry could become so industrialized. But that is what happened. Not
just agrarian work, but just about every imaginable occupation of that
period — especially menial labor — was intensely affected by industrial-
ization. The trend was steady: The entire economy eventually became
subjected to the machine.

The full-scale trend toward the network economy is equally hard to
imagine, but its progression is steady. It follows a predictable pattern.
The first jobs to be absorbed by the network economy are new jobs that
could only exist in the new world: code hackers, cool hunters, webmas-
ters, and Wall Street quants. Next to succumb are occupations with old
goals that can be accomplished faster or better with new tools: real es-
tate brokers, scientists, insurance actuaries, wholesalers, and anyone
else who sits at a desk. Finally, the network economy engulfs all the
unlikely rest — the butchers, bakers, and candlestick makers — until the
entire economy is suffused by networked knowledge.

The three great currents of the network economy: vast globaliza-
tion, steady dematerialization into knowledge, and deep, ubiquitous
networking — these three tides are washing over all shores. Their en-
croachment is steady, and self-reinforcing. Their combined effect can

80 / New Rules for the New Economy
be rendered simply: The net wins.

Strategies

Maximize the value of the network. Feed the web first. Networks are
nurtured by making it as easy as possible to participate. The more diverse
the players in your network — competitors, customers, associations, and
critics — the better. Becoming a member should be a breeze. You want
to know who your customers are, but you don't want to make it hard for
them to get to you (IDs, yes; passwords, no). You want to make it easy
for your competitors to join too (all their customers could potentially be
yours as well). Be open to the power of network effects: Relationships
are more powerful than technical quality. Especially beware of the "not-
invented-here" syndrome. The surest sign of a great network player is
its willingness to let go of its own standard (especially if it is "superior")
and adopt someone's else's to leverage the network's effect.

Seek the highest common denominator. Because of the laws of
plentitude and increasing returns, the most valuable innovations
are not the ones with the highest performance, but the ones with
the highest performance on the widest basis — the "highest per wid-
est." Feeding the web first means ignoring state-of-the-art advances,
and choosing instead the highest common denominator — the high-
est quality that is widely accepted. One practical reason to pick the
highest-per-widest techniques and technologies is because complex
technologies require passionate and informed users who can share
experience and context, and you want the maximum dispersion of us-
age that doesn't sacrifice quality.

Don't invest in Esperanto. No matter how superior another way
of doing something is, it can't displace an embedded standard — like
English. Avoid any scheme that requires the purchase of brand new
protocols when usable ones are widely adopted.

Apply an embedded standard in a new territory. Is there a way to
accomplish what you want using existing standards and existing webs
in a different context? Inventing a novel standard for an existing net-
work is quixotic. But some of the greatest success stories in current

Feed the Web First / 81

times are about firms that master one network and then use its embed-
ded standards to exploit an established network in need of improve-
ment. This process is called "interfection." The present revolution in
telephony is all about zealous internet firms that are interfecting the
old Bell-head world of moving voices with newly established proto-
cols for moving data on the internet (known as internet protocols, or
IP). The huge increasing returns that spin off the internet give them a
great advantage. Indeed, one telephony standard after another is fall-
ing before the relentless march of IP. Likewise, aggressive companies
are leveraging the established desktop standard of Windows NT — with
all its plentitude effects — to interfect new domains such as telephone
switching gear. Even the huge cable TV networks have something to of-
fer. The emerging standards for video transmission, such as MPEG, are
trying to migrate onto the internet. In choosing which standard to back,
consider dominant standards outside your current network that could
interfect your own turf.

Animate it. As the network economy unfolds, more firms will begin
to ask themselves this question: How do we put what we do into the
logic of networks? How do we prepare a product to behave with network
effects? How do we "netize" our product or service? (The answer is not
"put it on a web site.") Architects, for instance, generate huge volumes
of data. How can they be standardized? How can the data about a phys-
ical object (say a door) flow through or with that object? What are the
fewest functions we can add to glass windows to incorporate them into
networks? What steps can a contractor take to allow the networked flow
of information from any architect to any contractor to any builder to
any client? How do we increase the number of networks our service
embraces?

Side with the net. Imagine that in i960 an elf let you in on a secret:
For the next 50 years computers would shrink drastically and cheapen
yearly on a predictable basis. Subsequently, whenever you needed to
make a technological decision, if you had counted on the smaller and
cheaper, you would have always been right. Indeed you could have per-
formed financial miracles knowing little more than this rule. Here is
today's secret: In the coming 50 years, the net will expand and thicken
yearly on a predictable basis — its value growing exponentially as it em-

82 / New Rules for the New Economy

braces more members, and its costs of transactions drop toward zero.
Whenever you need to make a technological decision, if you err on the
side of choosing the more connected, the more open system, the more
widely linked standard, you will always be right.

Employ Evangelists. Economic webs are not alliances. There are of-
ten few financial ties among members of a web. An effective way of
establishing standards and coordinating development is through evan-
gelists. These are not salespeople, nor executives. Their job is simply
to extend the web, to identify others with common interests and then
assist in bringing them together. In the early days when Apple was a co-
creator of the emerging PC web, it successfully employed evangelists to
find third-party vendors to make plug-in boards, or to develop software
for their machines. Go and do likewise.

6 LET GO AT THE TOP

After Success, Devolution

The tightly linked nature of the emerging economy makes it behave like
a biological community. Wars and battles were the allegories of the in-
dustrial economy. Coevolution and infections are more apt in the new
economy.

Companies are like organisms evolving in an ecosystem. Some eco-
systems in nature offer few opportunities for life. In the Arctic there
are only a couple of strategies for survival, and a species had better
get good at one of them. Other biomes are chock-full of opportunities,
which are in constant flux, appearing and disappearing as species jockey
for their niches. The harmony we attribute to nature is not static perfec-
tion but a complex dance of ups, downs, trips and falls, and balance
regained.

Rich, interactive, and highly flexible in shape, the network economy
resembles a biome seething with action, a jungle in fast-forward mo-
tion. New niches open up constantly and vanish quickly. Competitors
sprout beneath you and then gobble your spot up. One day you are king
of the mountain, and the next day there is no mountain at all.

Biologists describe the struggle of an organism to adapt in this type
of habitat as a long climb uphill, where uphill means greater adapta-
tion. In this metaphor, an organism that is maximally adapted to the
times is situated on a peak. Imagine a commercial organization instead
of an organism. A company expends great effort to move its butt uphill,
or to evolve its product so that it is sitting on top, maximally adapted to
the consumer environment.

All organizations (profit and nonprofit alike) face two problems as

84 / New Rules for the New Economy

they attempt to find their peak of optimal fit. Both problems are exacer-
bated by the constant turbulence of the network economy.

First, unlike the industrial era's relatively simple environment, in
which it was fairly clear what an optimal product looked like and where
on the stable horizon a company should place itself, it is increasingly
difficult in the network economy to discern what hills are highest and
which summits are false.

In biological terms, the new economic landscape is "rugged," dis-
rupted by gulfs, precipices, and steep slopes. Trails are riddled with
dead ends, lead to false summits, and made impassable by big-time
discontinuities. Because the economic terrain is jumbled with no over-
all pattern, there is no certainty that a company intending to head up
a slope toward a peak new market is actually climbing anything larger
than a hill. In biospeak, they may succeed in getting to the top yet find
themselves stuck on a suboptimal peak.

Big and small companies alike have to deal with their new land-
Turbulent times mean that local
success is not global success.
A company may be at peak
efficiency, but on the wrong
mountain. The trick is to select
a high-potential area to excel
in.

scape. It's often unclear whether a firm should strive to be on top of a
mountain (for example, to be the world's most reliable hard disk manu-
facturer), when the whole mountain range beneath that particular peak
may sink in a few years (if everyone moves their storage onto large pro-
tein arrays). An organization can cheer itself silly on its way to becom-
ing the world's expert on a dead-end technology. (The nuclear power
industry offers one example.)

Some of the most perfect technology was created just before its de-
mise. Vacuum tube technology reached a nadir of complexity just be-
fore it vanished. As MIT economist James Utterback writes: "Firms are

Let Go at the Top / 85

remarkably creative in defending their entrenched technologies, which
often reach unimaginable heights of elegance in design and technical
performance only when their demise is clearly predictable." It's rela-
tively easy to arrive at a peak of perfection. The problem is that perfec-
tion can be local, or suboptimal, like being the best basketball player in
your state, but unaware of national tournaments. While a firm is con-
gratulating itself on creating the world's fastest punch card reader — the
fastest in the universe! — the rest of the economic world has moved on
to the PC.

The harsh news is that "getting stuck on a local peak" is a certainty
in the new economy.

Instability and disequilibrium are the norms; optimazation won't
last long. Sooner, rather than later, a product will be eclipsed at its
prime. Indeed, an innovation at its prime increases its chances of being
eclipsed. In Mastering the Dynamics of Innovation, a study of innova-
tion in the automobile industry, Utterback concludes that "an unhappy
byproduct of success in one generation of technology is a narrowing of
focus and vulnerability to competitors championing the next techno-
logical generation." The product may be perfect, but for an increasingly
smaller range of uses or customers.

While one product is perfecting its peak, an outsider can move the
entire mountain by changing the rules. Detroit was the peak of perfec-
tion for big cars, but suddenly the small-car mountain overshadowed it.
Sears was king of the retail mountain, but then Wal-Mart and Kmart's
innovations created a whole new mountain range that towered above
it. For a brief moment Nintendo owned the summits of the video-game
mountain until Sega and later Sony built separate mountains even
higher. Each of the displaced industries, companies, or products were
stuck on a less optimal local peak.

There is only one way out. The stuck organism must devolve. In or-
der to go from a peak of local success to another higher peak, it must
first go downhill. To do that it must reverse itself and for a while become
less adapted, less fit, less optimal. It must do business less efficiently,
with less perfection, relative to its current niche.

This is a problem. Organizations, like living beings, are hardwired

86 / New Rules for the New Economy

to optimize what they know — to cultivate success, not to throw it away.
Companies find devolving unthinkable and impossible. There is simply
no allowance in the enterprise for letting go.

And the better the company, the less room there is for devolution.

Everything about a modern organization is dedicated to pushing up-
hill. The CEO is trained, and paid well, to push the firm toward the peak.
Quality circles get the entire workforce marching uphill toward optimal
performance. Consultants monitor the tiniest detail, trying to eliminate
anything that might keep the company from attaining the peak of per-
fection. Reengineering wonks zero in on computer data showing which
parts of the organization are lagging behind. Even the receptionist is in
search of excellence.

Where in the modern company is the permission, let alone the skill,
to let go of something that is working, and trudge downhill toward
chaos?

And have no doubt: It will be chaotic and dangerous down below.
The definition of lower adaptivity is that it places you closer to extinc-
tion. But you have to descend and risk extinction in order to have the
opportunity to rise again.

Economist Joseph Schumpeter calls the progressive act of destroying
success "creative destruction." It's an apt term. Letting go of perfection
requires a brute act of will. And it can be done badly. Management guru
Tom Peters claims that corporate leaders are now being asked to do
two tasks — building up and then nimbly tearing down — and that these
two tasks require such diametrically opposed temperaments that the
same person cannot do both. He impishly suggests that a company in
the fast-moving terrain of the network economy ordain a Chief Destruc-
tion Officer.

With or without someone in charge of creative destruction, there is
no alternative (that we know of) to leaving behind perfectly good prod-
ucts, expensively developed technology, and wonderful brands, and
heading down to trouble in order to ascend again with hope.

Once upon a time this march was rare. The relatively stable markets
and technological environment of the industrial era were smooth, not
rugged. Only a few parameters changed each year, and they changed

Let Co at the Top / 87

gradually. Opportunities arrived with forewarning. Those days are over.
The biological nature of the new economic order means that the sud-
den disintegration of established domains will be as certain as the sud-
den appearance of the new.

There can be no expertise in innovation unless there is also exper-
tise in demolishing the ensconced.

There is nothing wrong with perfection. To be maximally fit for a
niche, to serve optimally, to seek the peak of perfection — these will al-
ways remain the goals of any firm, or individual. So why let go of perfec-
tion at the top?

The problem with the top is not too much perfection, but too little
perspective. Great success in one product or service tends to block a
longer, larger view of the opportunities available in the economy as a
whole, and of the rapidly shifting terrain ahead. Legendary, long-lived
companies are intensely outward-looking. They can spot a global peak
and distinguish it from the many false peaks. They understand that an
inward focus, especially a narrow focus on being "world's best" in some
matter, can work against long-term adaptation by blinding the organiza-
tion from seeking new heights. Better for the long haul is an outward
perspective that is always seeking alternative mountains to climb.

This outward vista is all the more critical in the new economy be-
cause perfection is no longer a solo act. Success is a highly interdepen-
dent enterprise, encompassing a network of vendors, customers, and
even competitors. A firm needs to explore widely, outside of the current
favored position, and at times contrarily.

Letting go at the top is not an act against perfection, but against
shortsightedness.

In addition to the scarcity of leaders willing to disassemble the prof-
itable, and the natural bias of companies toward perfection, there is
another reason why letting go is so hard. Economists Paul Milgrom and
John Roberts studied the competencies — the winning traits — of a large
number of firms in modern manufacturing and concluded that compe-
tencies of companies tended to occur in suites, or in a guilds of skills.

88 / New Rules for the New Economy

This natural bundling of traits makes it very difficult for contend-
ers to challenge a successful firm. As Richard Nelson, an economist at
Columbia University says, "Successful firms often are difficult to imitate
effectively because to do so requires that a competitor adopt a number
of different practices at once." Companies can buy technology and hu-
man skills in a particular area. But gradually acquiring one or two com-
petencies at a time does no good when you are attempting to displace a
highly successful firm. The whole suite of mastery has to be acquired si-
multaneously in order for you to be competitively effective. A firm such
as Disney is almost inimitable because of the difficulty of obtaining in
one swift swoop its highly integrated mix of skills.

The natural bundling of traits also makes unraveling for devolution
immensely difficult. To devolve demands going against all the best qual-
ities of an organization all at once. The organic world offers a number
of lessons in this regard. Biotechnology is built on the knowledge that
most genes don't code for anything themselves. Most genes regulate —
turn off and on — other genes. The genetic apparatus of a cell, then, is
a dense network of hyperlinked interactions. Any gene is indirectly con-
trolled by many other genes.

Thus, most attributes in a biological organism usually travel in the
genome as loosely coupled associations. Blue eyes and freckles, say. Or
red hair and a hot temper. Two important consequences follow from
this. First, to get rid of the redhead's feisty temperament by evolution
may also mean — at least at first — getting rid of the red hair. Animal
breeders know this dilemma firsthand. It is difficult to breed out an un-
wanted trait without breeding out many desirable ones. Chicken breeders
can't get rid of a chicken's aggressiveness without throwing out its egg-
laying proficiencies.

Companies work the same way. The interlocking guild of competen-
cies, which gives them their advantages, becomes a drawback during
change. The increased interlinkage of the network economy heightens
this dilemma. In the network economy, the skills of individual employ-
ees are more tightly connected, the activities of different departments
more highly coordinated, the goals of various firms more independent.
The net brings the influence of formerly unrelated forces to bear upon
each potential move.

The more successfully integrated a firm's capabilities are, the harder

Let Go at the Top / 89

it is to shift its expertise by changing just a little. Thus successful firms
are more prone to failure during high rates of change. (Success makes
it easy for the successful to deny this fact.) Indeed, the very success of
successful organizations makes them conservative toward change — be-
cause they must unravel many interdependent skills — even if some are
working fine.

The problem that IBM faced with the arrival of the personal com-
puter in the early 1980s was not the problem of acquiring technological
know-how. As a matter of fact, IBM already knew how to build personal
computers better than anyone. But the package of proficiencies the
blue suits had honed over the years to make IBM indomitable in the
mainframe computer field could not be gradually adapted to fit the new
faster-paced terrain of desktop-based computing. IBM was supreme in
the old regime because their sales, marketing, R&D, and management
skills were all optimally woven into a highly evolved machine. They
couldn't change the size of the computers they sold without also al-
tering their management, forecasting, and research skills at the same
time. Changing everything at once is difficult for anyone, anytime.

Because skill guilds constrain (and defend) an organization, it is of-
ten far easier to start a new organization than to change a successful
old one.

This is a major reason why the network economy is rich in start-ups.
Starting new is a less risky way to assemble an appropriate new set
of competencies than trying to rearrange an established firm, whose
highly intertwined bundles resist unraveling.

In a rugged economic landscape, about the only hope an established
company has for adapting to turbulent change is by employing the
"skunk works" mode, which reflects another biological imperative. Com-
puter simulations of evolution, particularly those run by David Ackely, a
researcher at Bellcore, demonstrate how the source for mutations that
eventually conquer a population start at the geographical fringes of the
population pool. Then after a period of "beta testing" on the margins,
the mutants overtake the center with their improvements and become
the majority.

At the edges, innovations don't have to push against the inertia of

90 / New Rules for the New Economy

an established order; they are mostly competing against other mutants.
The edges also permit more time for a novel organism to work out its
bugs without having to oppose highly evolved organisms. Once the
mutants are refined, however, they sweep rapidly through the old order
and soon become the dominant form.

This is the logic of skunk works. Hide a team far from the corporate
center, where the clever can operate in isolation, away from the suffo-
cating inertia of success. Protect the team from performance pressures
until their work has had the kinks ironed out. Then introduce the inno-
vation into the center. Every once in a while it will take over and become
the new standard.

Economist Michael Porter surveyed 100 industries in 10 countries
and found that in all the industries he studied, the source of innova-
tions were usually either "outsiders" or else relative outsiders — estab-
lished leaders in one industry making an entry into a new one.

To maximize innovation, maximize the fringes.

Encourage borders, outskirts, and temporary isolation where the
voltage of difference can spark the new. The principle of skunk works
plays a vital role in the network economy. By definition a network is
one huge edge. It has no fixed center. As the network grows it holds in-
creasing opportunities for protected backwaters where innovations can
hatch, out of view but plugged in. Once fine-tuned, the innovation can
replicate wildly. The global dimensions of the network economy means
that an advance can be spread quickly and completely through the
globe. The World Wide Web itself was created this way. The first soft-
ware for the web was written in the relative obscurity of an academic
research station in Geneva, Switzerland. Once it was up and running
in their own labs in 1991, it spread within six months to computers all
around the world.

The basic rules of success are eternal: serve customers obsessively,
escalate quality, outdo your competitors, have fun. The nature of the
new economy changes none of those rules. But the success they help
one attain is not what it used to be. However you want to measure it,
success is a type of inertia. The law of increasing returns can compound
it but success still follows its momentum to the top — but the top is

Let Go at the Top / 91

highly unstable now. Being at the top when the sands shift is a liability.
For anyone sane, success should breed paranoia.

In the highly turbulent, quickly reforming environment of the new
economy, the competitive advantage goes to the nimble and malleable,
the flexible and quick. Speed and agility trump size and experience. Fast
to find the new is only one half the equation; fast to let go is the other
important half.

Of all the lessons that biology has to offer us as we begin to as-
semble a network economy, the necessity of abandoning our successes
will be the hardest to practice.

Strategies

Don't mistake a clear view for a short distance. The terror of devolu-
tion is that a firm must remain intact while it descends into the harsh
deserts between the mountains of successes. It must continue to be
more or less profitable while it devolves. You can't jump from peak to
peak. No matter how smart or how speedy an organization is, it can't
get to where it wants to go unless it muddles across an undesirable
place one step at a time. Enduring a period of less than optimal fitness
is doubly difficult when a very clear image of the new perfection is in
plain sight.

For instance, sometime in the early 1990s the Encyclopaedia Britan-
nica company saw that they were stuck on a local peak. They were at the
top: the best encyclopedia in print. They had a worldwide sales force
peddling a world-recognized brand. But rising fast nearby was some-
thing new: CD-ROM. The outline of this dazzling new mountain was
clear. Its height was inspiring. But it was a different realm from their old
mountain: no paper, no door-to-door salespeople, cheap, little dinky
disks on the shelf, and a media that required constant updates. They
would have to undo much of what they knew. Still there, clear as could
be, was their future. But while the destination was extremely clear, the
path that led to it was treacherous. And, it turned out, the route was
even longer than they thought. The company spent millions, lost sales-
people in droves, and verged on collapse. They entered a scary period
during which neither print nor CD worked. Eventually they completed

92 / New Rules for the New Economy

To scale a higher peak — a

potentially greater gain — often
means crossing a valley of less
fitness first. A clear view of the
future should not be mistaken
for a short distance.

the CD-ROM encyclopedia they had envisioned many years earlier, but
only after an outsider (Microsoft) published a better one. Encyclopae-
dia Britannica's future is still in doubt. But their travails are common.
Says futurist Paul Saffo: "We tend to mistake a clear view of the future
for a short distance."

Today, nearly everyone in business has a clear view of the future of
TV. It's something that comes to you in the same way you get the inter-
net. You choose your shows, from 500 channels. You can shop, maybe
interact with a game, or click for more information about a movie you
are watching. The technology seems feasible, the physics logical, and
the economics plausible. But Future TV looks a lot closer than it really
is because the path between here and there winds through a barren
desert with little optimal about it. Although the economics may work
later, they barely work out now in the alkali flats. It may be that none of
the large television or computer or phone companies are sufficiently
nimble (or hungry) to make it across the valley of death — even though
the shape of success is so visible.

Send the network out. There is only one sound strategy for cross-
ing the valley: Don't go alone. Established firms are now doing what
they should be doing: weaving dozens, if not hundreds, of alliances and
partnerships; seeking out as many networks of affiliation and common
cause as possible, sharing the risk by making a web. A motley caravan
of firms can cross a suboptimal stretch with hope. Banding together
buys their networks several things. First, it allows knowledge about the
terrain to be shared. Some firm riding point might discover a small hill
of opportunity. Settling there allows small oases of opportunity to be

Let Go at the Top / 93

created. If enough intermediate oases can be found or made, the long
journey can become a series of shorter hops along an archipelago of
small successes. The more firms, customers, explorers, and vested in-
terests that are attempting to cross, the more likely the archipelago can
be found or created.

To create the future car — a car that is easily imaginable right now —
an entrepreneurial car company can only succeed by spinning together
a network of vendors, regulators, insurers, road makers, and competi-
tors to help others to devolve quickly and cross.

Who is in charge of devolution? It is a rare leader who can creatively
destroy as well as relentlessly build. It's a rare committee that will vote
to terminate what works. It's a rare outsider whose advice to relinquish
a golden oldie will be heeded. You are in charge of devolving. Everyone
is. It's just one more chore in the network economy.

Question success. Not every success needs to be abandoned drasti-
cally, but every success needs to be questioned drastically. Do interest-
ing substitutes exist? Are radical alternatives receiving compounding
attention? You need to consider innovations far afield, ones that are not
"on the same mountain." Are there innovations that are changing the
rules of the game? Beware of minor incremental improvements — slight
baby steps on the same mountain. These can be a form of denial. Nich-
olas Negroponte, director of the MIT Media Lab, declares "Incremen-
talism is innovation's worst enemy."

Searching as a way of life. In the network economy, nine times out
often, your fiercest competitor will not come from your own field. In tur-
bulent times, when little is locked in, it is imperative to search as wide
as possible for places where innovations erupt. Innovations increasingly
interfect from other domains. A ceaseless blanket search — wide, easy,
and shallow — is the only way you can be sure you will not be surprised.
Don't read trade magazines in your field; scan the magazines of other
trades. Talk to anthropologists, poets, historians, artists, philosophers.
Hire some 17-year-olds to work in your office. Make a habit to visit a
web site at random. Tune in to talk radio. Take a class in scenario mak-
ing. You'll have a much better chance at recognizing the emergence of
something important if you treat these remote venues as neighbors.

Jp^gy PLACES TO

Making a Different Kind of Big

"Geography is dead!"

This pronouncement has become a cliche among the advocates of
digitalization and telecommunications. The advent of universal and in-
expensive communication is said to usher in an era where distance,
place, real estate, and geography are irrelevant. The notion is only half
true.

Place still matters, and will for a long time to come. However, the
new economy operates in a "space" rather than a place, and over time
more and more economic transactions will migrate to this new space.

Geography and real estate, however, will remain, well . . . real. Cities
will flourish, and the value of a distinctive place, such as a wilderness
area, or a charming hill village, will only increase.

Tom Peters, the perennially entertaining management guru, likes to
scare the daylights out of dazed American CEOs by proclaiming, "Think
of Asia, Latin America, Eastern Europe! They're smart, fast, and cheap.
And they're next door. Your worst nightmare of a competitor is now
only one-eighth of a second away!" That's the maximum time it takes
a signal to travel from one end of the globe to the other. These hungry
competitors can do anything you can do, cheaper, and they all are, at
most, only an eighth of a second away. In short, Peters proclaims the
death of distance and the arrival of globalization.

That's the bad news. The good news is that those geographically far
away competitors will never be any closer than an eighth of a second.
And for many things in life, that is too far away.

A kiss for instance. Or playing sports. Or getting to know flowers.

From Places to Spaces / 95

Start-up companies selling futuristic multiplayer online games have dis-
covered that the inherent delay in the speed of light circling the globe
causes real-time experiences to fail. That noticeable gap makes no real
difference in the transmission of a book order, or a weather signal, but
enough of life thrives on subtle instantaneous responses that one-
eighth of a second kills intimacy and spontaneity. Thus actual real-time
face-to-face meetings will retain their irreplaceable value. Thus airline
travel will increase as fast as online communication increases. Thus cit-
ies will endure as lag-free places where there are no one-eighth second
delays.

People will inhabit places, but increasingly the economy inhabits a
space.

A place is bounded by four dimensions. For two things to be adja-
cent, they must be close to each other on one of four axes: up/down,
left/right, back/forth (x, y, z), and time. As rich as physical places are
(and we still don't appreciate how rich they can be), they limit the num-
ber of connections that entities can make within them. A person in a
place can only interact with a fixed and rather small number of other
people in the same vicinity. Artifacts can touch only the other artifacts
in close proximity.

A space, unlike a place, is an electronically created environment. It
is where more and more of the economy happens. Unlike place, space
has unlimited dimensions. Entities (people, objects, agents, bits, nodes,
etc.) can be adjacent in a thousand different ways and a thousand differ-
ent directions. A person in an electronic space can communicate to 10

The invention of
communication allowed life to
evolve from globular organisms
into fantastic beings, just as
networks allow place-based
firms to blossom into fantastic
spaces.

96 / New Rules for the New Economy

million people at once, or interact in a game with 20,000 others — things
that would be impossible in physical space. An automobile can be linked
in hundreds of directions — to other cars stuck in traffic miles away, en-
vironmental monitors, satellite navigation antennas, toll collectors, and
the manufacturer's engine-performance center. In physical place a car can
only interact with those within braking distance of its front and rear bum-
pers.

Spaces aren't bound by proximity. The advantage of spaces is rooted
less in their nongeographical virtuality and more in their unlimited ability
to absorb connections and relationships. By means of communications,
network spaces can connect all kinds of nodes, dimensions, relation-
ships, and interactions — not just those physically close to one another.

The popular suffix of "space" is a truncated version of cyberspace,
a science fiction term for an immersive electronic space. But the roots
of the term are deeper. The technical concept of "space" came out of
mathematics and computer science. Space is one way scientists de-
scribe complex systems; very complex spaces have their own unique
dynamics. The notation of space is particularly handy when describing
the ordinarily vague and indefinite form of networks. The net, as it en-
compasses billions of objects and agents (there are already more than
100,000 cameras on the net), operates in what mathematicians call
"very high dimensions," and has correspondingly novel dynamics. As
electronic mediated environments expand, place has less influence and
complex space more. As the economy infiltrates each network medium,
it trades a physical marketplace for a conceptual marketspace.

The network economy shifts places to spaces.

In the new realm of high dimensional spaces, the network economy
exhibits the following space-based behaviors.

■ A different kind of bigness

■ Rampant clustering

■ Peer authority

■ Re-intermediation

The industrial economy made it impossible to live next door to the

From Places to Spaces / 97

source of all the goods consumers desired. If you wanted bananas,
many intermediaries had to handle the fruit between the plantation
in Honduras and your kitchen. Between the author of a book and you
there needed to be a chain of editors, bankers, printers, distributors,
wholesalers, and booksellers. Between you and good health care were
doctors, nurses, insurance behemoths, and hospital staff. Between you
and the car of your dreams stood a line of miners, smelters, engineers,
manufacturers, railroad yards, showrooms, and salesmen. Each one
of these agents moved the good or service along; some by completing
the product (the car engineer) or customizing the service (the hospital
staff), and some simply by physically moving it toward you (the banana
boat). In business theory this line came to be known as the value chain.
Each intermediate link in the long chain of creation added some mea-
sure of extra value, justifying the cost the link added to the good's final
price. Companies competed to insert themselves into a value chain,
then to expand their control of greater lengths of the chain.

One of the very first noticeable effects of computers and networked
communications was the alarming way they disrupted traditional value
chains. Futurist Paul Saffo calls the multiple interactions needed to sur-
vive in the new economy a move "from value chain to value web."

In the markets pace of networks, value flows in webs.

Many classic value chains were crowded with intermediaries who
distributed a completed product or service. Take the banana wholesal-
ers. Although they physically handled the product and often stored it in
inventory at great cost, their primary value to the customer was infor-
mational. In theory, small bunches of bananas could be wrapped and
sent directly to your home from a particular plantation with fewer in-
termediaries involved in warehousing and storage, and thus at lower
costs. You would place an order directly to Best Bananas in Honduras
for one bunch per week, except during the school holidays, and they
then would mail them out to you. To do that effectively, though, would
require network technology capable of a) finding a plantation you like;
b) getting the right bunch to you at the right time; c) shifting to a coop-
erating planter if the first planter's fruit was not yet ripe; d) tracking the
account payable for such a tiny buyer as yourself; and, e) dealing with

98 / New Rules for the New Economy

all the millions of ordinary exceptions and screw-ups that any system as
complex as this would entail.

The industrial age had no technology capable of doing that, so it
substituted the wholesale system for networked information. Orders
were aggregated at the local produce stand, sent to a wholesaler, who
aggregated them further, and relayed the combined request through
various shipping intermediaries to a farmers' coop, which distributed
orders to various planters. Your personal "order" was submerged in a
sea of others; the system essentially ignored it. Making their way back
to you, the bananas followed a reverse chain of links, sitting in ware-
houses as a way to buffer the incomplete consumer information they
should have had.

It may be a long while before bananas skip the industrial value chain,
but other foods, higher priced and not as bulky, already can be bought
this way. Food fanatics in cities anywhere can purchase specialty cof-
fees, or authentic maple syrup, or organic beef by linking up with farm-
ers directly and getting their goods right from the farm via the post
office, or FedEx networks, bypassing the wholesale and retail interme-
diaries. When gourmets use web sites and direct-mail catalogs to buy
directly from growers, the traditional intermediaries are taken out of the
picture.

The banking industry was the first to name this creeping displace-
ment of intermediaries. They noticed, quite rightly, that as information
technology infiltrated the banking industry, and as the industry was de-
regulated, nobody seemed to need banks anymore — at least not banks
as bureaucratic intermediaries. You could get easier loans at Sears,
higher interest from a mutual fund, and better service at an ATM. Bank-
ing functions were being "d/sintermediated" the bankers cried! For the
typical neighborhood bank this was especially true. The disintermedia-
tion of the financial systems continues unabated; every week another
bank branch shuts down.

As more commercial activities shift toward knowledge and informa-
tion, the economy seems ripe for fatal disintermediation. Why should
such digital age products as music CDs and news reports travel any
other route except the short one that proceeds directly from the artist
or author to you, the listener? Recent success stories, such as the case
of Matt Drudge, give credence to a network's inclination to bypass the

From Places to Spaces / 99

middle guys. Drudge, a no-name Hollywood gossip reporter, dispatched
his insider scoops directly from a bedroom computer to a growing list
of web readers until he had a national readership and a national brand.
Some bands, both famous and unknown, are attempting the same thing
in music. The laborious tasks of stamping out disks, storing them, truck-
ing them across country, warehousing on pallets, and then fighting for
display space in a music store all seem to evaporate as network technolo-
gies make the transmission of music to fans direct and short. Big net,
no middlemen, no fuss.

The potential of disintermediation, however, looms larger than the
actuality at the moment, and casts a large and frightening shadow. Re-
tailers, especially, are in a panic. If anyone can log on to the web and
comparison shop for the lowest-priced refrigerator directly from the man-
ufacturer, what's in it for the mall stores? If anyone can order up a video
from the studio, what's in it for the local video shop? If anyone can get
5,000 sitcoms on demand, who needs N BC? The wholesalers are worried
silly, but artists and creators are euphoric. The web promised (finally!) a
way to beat the system of limited shelf space that stymied the debut of
new novels, new albums, and new products in every type of store. With
the web, there was unlimited shelf space. There was success in store for
everyone!

When Wired magazine began developing one of the very first com-
mercial web sites in 1993, the phrase "unlimited shelf space" was often
used by potential contributors. Closely linked to this phrase was "bypass-
ing the editor": the notion that editors were superfluous intermediaries,
and that writers and readers didn't have to be subject to the frustrating
and degrading filtering of go-betweeners. The raw stuff would flow in its

Technology encourages the
proliferation of intermediates.
Smaller companies, in greater
numbers, are able to find
niches where niches could not
have existed before.

Industrial
Economy

Network
Economy

too / New Rules for the New Economy

full length and naked power directly from writer to reader. Our first proto-
types convinced us that that wasn't how the net worked. The web site we
launched and continue to build today (Wired Digital) is based on a differ-
ent premise: that in a network economy, intermediaries have tremendous
value.

Everything about the web, especially the over 1 million web sites cur-
rently in existence, suggests that the expectation that the network econ-
omy favors disintermediation is exactly wrong. It is quite the opposite.
Network technologies do not eliminate intermediaries. They spawn
them. Networks are a cradle for intermediaries.

Everywhere networks go, intermediaries follow. The more nodes, the
more middlemen.

It is so cheap to complete a transaction from almost anywhere, any-
time, that tiny slivers of value, built upon microcosts of transactions,
can be surgically inserted into all manner of processes and products.
Because each microvalue sliver is so cheap, there is economic room for
multiple microvalue slivers where before there was only room for one
intermediary. As transaction costs plummet to the nanopenny level,
some little crumb of value can be profitably added to more and more
processes.

The combinatorial mathematics of networks also boost the oppor-
tunities for intermediaries. By definition, every node on a network is a
node between other nodes. The more connections there are between
members in a net, the more intermediary nodes there can be. Every-
thing in a network is intermediating something else.

All nodes in a network are intermediaries.

Someday everyone in the world will have email, and when they do,
I don't want six billion emails a day as everyone shares what's on their
mind. Since half the world will probably have their own businesses, and
half of those will be start-ups, I will do everything I can to insert inter-
mediaries between my mailbox and their mailsenders, to sort out, route,
and filter my incoming mail. By the same token when I go to email old
Mohammed Jhang, someone whom I have not met, who lives in Chinese

From Places to Spaces / 101

Turkestan, to let him know about my latest gene therapy cure for arthri-
tis, I'll need an intermediary to find him and then to reach past his block-
ing filters. I probably won't get through so I'll need more intermediaries
(An advertiser? A lottery? A locating agent?) to lure him into the open,
perhaps a pigeon-racing club, or the cineplex where he gets his movies
from, to make him aware of my discovery. Sure, anyone can type "new
gene therapy cure for arthritis" and turn up 32,000 hits. But you need
intermediaries to vouch for their medical worthiness. You need inter-
mediaries to compare my price and the others.

The marketspace of the new economy can hold far more interme-
diaries than the marketplace of the old could. This swelling bulk of
intermediaries becomes an exaggerated middle. As networks prolifer-
ate, so do overlapping clusters of intersecting interests that reside in
the realm of the middle. In fact the hypermiddle is less a size than a
shape.

Technology has always influenced the size of companies. The inven-
tion of the elevator made possible high-rise buildings, which brought
thousands of employees together into one tightly coupled physical
space. High-rise towers launched the golden era of the centralized
corporation. The advent of telephones on employee desks allowed the
centralized corporation to spawn branches in neighboring cities and
states, so that corporations grew in staff; at its peak in 1967 GM em-
ployed some 850,000 people in all of its factories and administration
buildings.

Computers and networking technology initiated a shift in the other
direction. What took 8 people before might be done now with 7 using
technology. Firms that relied heavily on these technologies could reduce

Network technology increases

One million plus
person Firm

the size of the largest firms
yet makes it more possible
to have smaller firms while

also increasing the number of
midsize firms.

No-person
Firm

102 / New Rules for the New Economy

the number of employees. A company like Microsoft today employs a
relatively meager 20,000 people.

If firms got smaller with tiny doses of networking technology, then
the logical extrapolation dictated that with large doses the firm should
continue to reduce until it reached one employee. Some statistics tend
to confirm this drift. Counting the 14 million self-employed, the 8.3 mil-
lion independent contractors, and the 2.6 million temporarily employed
in the United States, there are 25 million Americans today working as
a unit of one. If this trend continues for a couple more decades, in the
future everyone will be a free-agent working for themselves, and our
country will be a free-agent nation.

But network power cuts both ways. Although networks empower the
solo practitioner, they also empower very large organizations. We are
just as likely to see the rise of the Godzilla-nation as the free-agent na-
tion. Big has not really been done yet. With the incredible place-shifting
power of communication technologies, and a yet-to-be-tapped global
market, the world will soon witness corporations that will dwarf the size
of the old GM. One can imagine a truly global consultancy, such as
Andersen Consultants or Ernst & Young, having a staff of one million
worldwide.

But the big will have a different kind of bigness.

In the space of networks, size is reckoned differently. The new organi-
zation is flat, spread out laterally, diffuse, with nested cores, and swollen
in the middle. Companies will change shape more than they will change
size.

During the industrial era, size was polarized to extremes. There was
the "world," or the masses, and there was "I." Industrialization empha-
sized the large-scale efficiencies of mass production, which quickly led
to mass consumption and mass society. A drift to the large, if not the
largest, coursed through the society. If something was worth doing well,
it was worth doing at the scale of the world. Ambitions ran to the tallest
skyscraper, the biggest factory, the largest dam, the longest bridge. The
technologies of communication of that age also flexed the muscle of
big. The printed page and the radio signal — as central to the industrial
age as anything made of iron — informed, educated, and mobilized hun-

From Places to Spaces / 103

dreds of millions from a single transmission source. The power of big
was never so nicely diagrammed as in the TV: a tiny spark amplified to
reach billions of people over thousands of miles at once, in unison.

The "I" on the other hand was fed by mass advertising and the cult
of the individual, which sprang up after the Second World War. A fasci-
nation with psychoanalysis, with the ego, with personal expression and
self-esteem, culminated in the "Me decades" starting in the 1970s. The
first bits of the information age fed this whetted appetite for further
individualism. We got personal computers amid personal trainers, per-
sonal advisers, and expectations of everything personalized.

Left behind by industrialization was the realm of the middle. The
middle was once where everyone lived and most things happened. This
size once flourished in geographical towns (with tens of thousands),
ordinary communities (with thousands) and neighborhoods (with hun-
dreds). Places embraced the middle very well.

But the vitality of places was weakened by a bifurcating pressure to
make things either huge for the masses or solo for the personal. The
logic of the modern was: it must appeal to everyone, or to only me.
Neither mass society nor the cult of the personal was equipped to deal
with the peculiar dynamics of the middle. There was little economic or
technological support for aiming an innovation at 5,000 people. Nei-
ther broadcast nor the personal chip, for example, really knew how to
do towns and neighborhoods.

The network economy encourages the middle space. It supplies
technology (which the industrial age could not) to nurture mid-sized
wonders.

Technology for mass production will remain. Technology to custom-
ize the personal will accelerate. But for the first time we have technol-
ogy naturally suited for a size smaller than mass and greater than the
self. We have a technology of net and web, stuffed with middleness.

Futurist Alvin Toffler says it best: "The era of mass society is over."
He ticks off the casualties: "No more mass production. No more mass
consumption. No more mass education. No more mass democracy. No
more weapons of mass destruction. No more mass entertainment."

In its place: a world of demassified niches. Niche production, niche

104 / New Rules for the New Economy

consumption, niche diversion, niche education. Niche world. Communi-
ties. Affinity groups. Clubs. Special Interest Groups. Clans. Subcultures.
Tribes. Cults. (There is nothing Utopian about this world.) Instead of the
mass technology of broadcast TV, we now have net-centric alternatives.

We see the problem of the unserved middle most clearly in com-
munication media. Say you wanted to talk to 10,000 people once a day.
Unless you wanted to speak to a group bounded by geography — a small
town, or a subset of a small city — you'd be stymied. You can broad-
cast to a million unknowns hoping you happen to catch some of the
10,000 you want, or you can slowly collect the names of individuals
who contact you, one by one, and transmit to them directly. Neither way
is elegant. Retailers call this the "hard middle," because it is so hard to
service a group of 10,000 customers who share a common interest but
not a common geography. Retailers crave the middle because they have
learned that you can't appeal to folks with a simple naked exchange
of money. You need other essentials of marketplaces — conversations,
loitering, flirting, people-watching. Before you can have commerce, you
need a community, a middle number of interacting people.

It takes a village to make a mall. Community precedes commerce.

The hard middle is a pervasive problem. We have tools to access
the ideas in one person's book: its index and table of contents. We have
tools to access the ideas of a library of millions of books: its card cata-
log. But we don't have tools to access ideas in the hard middle, the re-
gion of expertise in 10,000 scholars, or 1,000 books. Where do you go
for a listing of key words, key subjects, and key ideas for the complete

Services and goods for
previously ignored community-
and town-sized groups, also
known as the hard middle, can
make economic sense with
network technology.

Big

Middle

H

Small

Few

Many

From Places to Spaces / 105

literature about the U.S. Civil War?

Until recently, nowhere. Today, the symbol WWW immediately
pops into our mind. We see in the World Wide Web the promise of
creating a viable midlands. In this particular case the hyperlinking of
all documents could be filtered and categorized to generate an index to
middle-sized knowledge.

The electronic space encourages middle communities. Unlike either
broadcast or PC chips, a network fosters the energy that flows from
the friend of a friend to the friend of a friend. Network architecture can
find, cultivate, persuade, manage, and nourish intermediate-sized au-
diences and communities focused on common interests. Niche mar-
kets, in other words. Magazines, rooted in the postal system network,
have served niche markets for a century. But the emerging broadband
network offers many relationships the postal network (and magazines)
could not: spontaneous reply, fully symmetrical bandwidth, true peer-
age communication, archives, filtering, community memory, etc.

Network logic supports the middle space in several ways.

First, the plunging costs of information make it possible to find,
then connect, two passions together far more efficiently than in the
past. Once connected, cheap transactions keep the connection flour-
ishing.

Second, symmetrical messaging, text, video, audio, 3D spaces, ar-
chives, privacy controls, all enhance the once slim attractions of a vir-
tual community experience, keeping the community longer.

Third, the ubiquity of e-money in the network means that every niche
has the ability to initiate an indigenous economy. The knowledge that
dog breeders used to swap among themselves can become lucrative to
the community as a whole when plugged into the network economy.

Fourth, the border-collapsing nature of the network economy means
embryonic communities can theoretically draw upon a larger pool of
potential members: all 6 billion humans. The law of increasing returns
can feed a small interest into a mid-sized interest. Whereas once there
was a lone fanatic for every notion, now there is a devoted web site for
every fanatic notion; soon there can be 10,000 fellow enthusiasts for
every fascination.

The network economy has set into motion the power of hobby tribes
and informed peers. Amateurs, plugged into the net, discover comets,

106 / New Rules for the New Economy

find fossils, and track bird migrations better than pros. By network-
ing their interests and passing tips around, amateurs also create software
in languages so new that they are taught in no classrooms. These self-
organized communities, unleashed from their obscurity by the net, are
the new authorities.

Silent movie buffs and meteorite collectors are quickly gathering on
the net because the net's space coheres them into a middle market,
served at last by business and sales aimed directly at them. Egyptolo-
gists or cancer patients can create a mid-sized agora (neither insignifi-
cant nor huge) for ideas and knowledge. There was no place in mass
markets for the niche communities of ethnic tribes or Klingon speakers,
but the network economy constructs a space for them.

But mass broadcast TV and big print publishing are not going away.
The chief advantage of peerage networks — that information flows in
ripples through a web of equal nodes — is also the chief weakness of
networks. Information can only advance by indirect osmosis, passing
along like gossip. The web becomes a thicket of obstacles preventing
simultaneous dissemination to all parts.

The net shifts from mass media to mess media.

On the new mess media, rumor, conspiracy, and paranoia run ram-
pant. These have always been the downsides of communities; network
midlands will also have to learn to deal with impenetrable webs and
paranoic sensibilities. Capitalizing on these disadvantages, broadcast
will thrive symbiotically within the network economy. Sometimes real-
time signals en masse are needed and wanted. Broadcast's flyover will
be used, or material will be directly pushed to users. The web needs
broadcast to focus attention, and broadcast needs the web to find com-
munities.

Network technology expands all sizes. It enables the biggest to be-
come bigger and the smallest to become smaller. In the near future
we can expect to see institutions larger than they have ever been, and
smaller than they have ever been. For instance, a few banks will grow
monstrously large at the same time that other banks shrink to the size
of a smart card in a wallet and increase their numbers by millions. The
middle expands, too. That hard-to-reach territory that once was well

From Places to Spaces / 107

served by places is rejuvenated.

The space of network nodes and flows creates new social organiza-
tions, new forms of companies, in oddball sizes, and in unconventional
arrangements. We are on the brink of entering a world where almost
any shape of business is possible.

Strategies

The only side a network has is outside. Like a rapidly spinning gal-
axy, the net creates an unrelenting force that sends everything from the
inside toward the outer edges. Since little is left inside, the action is
thrown to the perimeter. Rather than buck this centripetal force, com-
panies should consider outsourcing chores to other equally amorphous
networked companies. The most powerful capitulation to the net's out-
ward spin is to outsource seemingly core activities. For instance, some
airline companies outsource the business of air-freight hauling, even
though the cargo is carried by their own planes. There are 1 ,001 reasons
why core outsourcing can't be done, but 999 of them ignore the cen-
tripetal force of the network economy.

Prepare for flash crowds. Electronic spaces unhinge a crowd of visi-
tors: They can appear in a flash and then leave in a flash. During the
chess match between Deep Blue and Gary Kasparov, the IBM web site
welcomed 5 million visitors. When the match was over the site was
empty. On the eve of the 1996 U.S. elections, the CNN web site experi-
enced 50 million attempts to log on. The next day, the crowd was gone.
One day a flash crowd is pounding at the doors, the next day they have
vanished. The mass audience has transformed itself into a wave that
swishes around from one hot spot to another. But the nature of spaces
is that in order to accommodate a flash crowd when they do come, you
have to be ready, tooled up.

HARMONY, ALL

Seeking Sustainable Disequi-
librium

In the industrial perspective, the economy was a machine that was to
be tweaked to optimal efficiency, and once finely tuned, maintained in
productive harmony. Companies or industries especially productive of
jobs or goods had to be protected and cherished at all costs, as if these
firms were rare watches in a glass case.

As networks have permeated our world, the economy has come to
resemble an ecology of organisms, interlinked and coevolving, con-
stantly in flux, deeply tangled, ever expanding at its edges. As we know
from recent ecological studies, no balance exists in nature; rather, as
evolution proceeds, there is perpetual disruption as new species dis-
place old, as natural biomes shift in their makeup, and as organisms
and environments transform each other.

Even the archetypal glories of hardwood forests or coastal wetlands,
with their apparent wondrous harmony of species, are temporary feder-
ations on the move. Harmony in nature is fleeting. Over relatively short
periods of biological time, the mix of species churns, the location of
ecosystems drift, and the roster of animals and plants changes as they
come and go.

So it is with network perspective: companies come and go quickly,
careers are patchworks of vocations, industries are indefinite groupings
of fluctuating firms.

Change is no stranger to the industrial economy or the embryonic
information economy; Alvin Toffler coined the term "future shock" in
1970 as the reasonable response of humans to an era of accelerating
change.

No Harmony, All Flux / 109
But the network economy has moved from change to flux.

Change, even in its shocking forms, is rapid difference. Flux, on the
other hand, is more like the Hindu god Shiva, a creative force of destruc-
tion and genesis. Flux topples the incumbent and creates a platform for
more innovation and birth. This dynamic state might be thought of as
"compounded rebirth." And its genesis hovers on the edge of chaos.

Donald Hicks of the University ofTexas studied the half-life of Texan
businesses for the past 22 years and found that their longevity has
dropped by half since 1970. That's change. But Austin, the city in Texas
in which new businesses have the shortest expected life spans, also has
the fastest-growing number of new jobs and the highest wages. That's
flux.

Hicks told his sponsors in Texas that "the vast majority of the

employers and employment on which Texans will depend in the year
2026 — or even 2006 — do not yet exist." In order to produce 3 million
new jobs by 2020, 15 million new jobs must be created in all, because
of flux. "Rather than considering jobs as a fixed sum to be protected
and augmented, Hicks argued, the state should focus on encouraging
economic churning — on continually recreating the state's economy,"
writes Jerry Useem in Inc., a small-business magazine that featured
Hick's report. Ironically, only by promoting flux can long-term stability
be achieved.

When flux is inhibited, slow death takes over. Contrast Texas and
the other 49 states with the European Union. Between 1980 and 1995
Europe protected 12 million governmental jobs, and in the process

The number of old jobs lost
increases, but not as fast as the

number of new jobs created.
More important, the spread
of gained jobs over lost jobs
widens.

no / New Rules for the New Economy

of fostering stasis lost 5 million jobs in the private sector. The United
States, fostering flux, saw a staggering 44 million old jobs disappear
from the private sector. But 73 million new jobs were generated, for a
net gain of 29 million, and in the process the United States kept its
12 million government jobs, too. If you can stand the turmoil, flux tri-
umphs.

This notion of constant flux is familiar to ecologists and those who
manage large networks. The sustained vitality of a complex network re-
quires that the net keep provoking itself out of balance.

If the system settles into harmony and equilibrium, it will eventually
stagnate and die.

Innovation is disruption; constant innovation is perpetual disrup-
tion. This seems to be the goal of a well-made network: to sustain a
perpetual disequilibrium. A few economists studying the new economy
(among them Paul Romer and Brian Arthur) have come to similar con-
clusions. Their work suggests that robust growth sustains itself by pois-
ing on the edge of constant chaos. "If I have had a constant purpose it
is to show that transformation, change, and messiness are natural in
the economy," writes Arthur.

The difference between chaos and the edge of chaos is subtle. Apple
Computer, in its attempt to seek persistent disequilibrium and stay in-
novative, may have tottered too far off-balance and let itself unravel to-
ward extinction. Or, if its luck holds, it may discover a new mountain to
ascend after a near-death experience.

The dark side of flux is that the new economy builds on the constant
extinction of individual companies as they're outpaced or morphed
into yet newer companies in new fields. Industries and occupations
also experience this churn. Even a sequence of rapid job changes for
workers — let alone lifetime employment — is on its way out. Instead, ca-
reers — if that is the word for them — will increasingly resemble networks
of multiple and simultaneous commitments with a constant churn of
new skills and outmoded roles. About 20% of the American workforce
already have an arrangement other than the traditional employee rela-
tionship with one employer. And 86% of them claim to be happy about

No Harmony, All Flux / m

it.

Nowhere is this trend toward constant flux more evident than in the
entertainment industry centered in southern California. Hollywood's
"cultural-industrial complex" includes not just film, but also music, multi-
media, theme park design, TV production, and commercials.

Giant film studios no longer make movies. Loose entrepreneurial
networks of small firms make movies, which appear under the names
of the big studios. In addition to various camera crews, about 40 to 50
other firms, plus scores of freelancers, connect up to produce a movie;
these include special effects vendors, prop specialists, lighting techni-
cians, payroll agencies, security folks, and catering firms. They convene
as one financial organization for the duration of the movie project, and
then when the movie is done, the company disperses. Not too much
later they will reconvene as other movie-making entities in entirely new
ad hoc arrangements. Cyberpunk author Bruce Sterling has his own in-
imitable way of describing the flux of "Hollywood film ad-hocracies."
To make a movie, he says, "You're pitchforking a bunch of freelancers
together, exposing some film, using the movie as the billboard to sell
the ancillary rights, and after the thing gets slotted to video, everybody
just vanishes."

Fewer than ten entertainment companies employ more than 1,000
employees. Of the 250,000 people involved in the entertainment com-
plex in the Los Angeles region, an estimated 85% of the firms employ
10 people or fewer. Joel Kotkin, author of a landmark 1995 article in Inc.
magazine entitled, "Why Every Business Will Be Like Show Business,"
writes: "Hollywood has mutated from an industry of classic huge, verti-
cally integrated corporations into the world's best example of a network
economy. Eventually, every knowledge-intensive industry will end up in
the same flattened, atomized state. Hollywood just has gotten there
first."

Silicon Valley is not far behind. The ICE businesses — information,
communication, and entertainment — all rely on speed and flexibility to
survive in a self-made speedy and flexible environment. Things move
so fast that even a corporation — any corporation — seems too rigid and
staid. You can't alter bureaucratic structure fast enough, so don't even
build one to begin with.

112 / New Rules for the New Economy

Networks are immensely turbulent and uncertain. The prospect of
constantly tearing down what is now working will make future shock
seem tame. As creatures of habit we will challenge the need to undo es-
tablished successes. We are sure to find exhausting the constant, fierce
birthing of so much that is new. The network economy is so primed to
generate self-making newness that we may experience this ceaseless
tide of birth as a type of violence.

In a poetic sense, the prime goal of the new economy is to undo —
company by company, industry by industry — the industrial economy.

In reality, of course, the industrial cortex cannot be undone. But a
larger web of new, more agile, more tightly linked organizations can
be woven around it. These upstart firms bank on constant change and
flux.

Change itself is no news, however. Ordinary change triggers yawns.
Most change is mere churn, a random disposable newness that accom-
plishes little. Churn is the status quo for these times. At the other extreme,
there is change so radical that it topples the tower. Like inventions that fail
because they are way ahead of their times, it is possible to reach too far
with change.

What the network economy coaxes forth is a selective flux. The right
kind of change, in the right doses. In almost all respects this kind of
change is what we mean by innovation.

The world "innovation" is so common now that its true meaning is
hidden. A truly innovative step is neither too staid and obvious, nor too
far out. The innovative step is change that is neither random direction-
less churn, nor so outrageous that it can't be appreciated. We wouldn't
properly call just another variation of something an innovation. We also
wouldn't call a shift to something that only worked in theory, but not prac-
tice, or that required a massive change in everyone else's behavior to work,
an innovation.

A real innovation is sufficiently different to be dangerous. It is change
just this side of being ludicrous. It skirts the edge of the disaster, with-
out going over. Real innovation is scary. It is anything but harmonious.

The selective flux of innovation permeates the network economy the

No Harmony, All Flux / 113

way efficiency permeated the industrial economy. The innovative flux is
not merely dedicated to devising more interesting products, although
that is its everyday chore. Innovation and flux saturate the entire emerg-
ing space of the new economy. Innovation premiers in:

New products

New categories of products

New methods to make old and new products

New types of organizations to make products

New industries

New economies

Chaos

Order

Flux

Because large systems must
tread a path between the
ossification of order and the
destruction of chaos, networks
tend to be in a constant state of
turmoil and flux.

All of these will twist and turn as change, dangerous change, spirals
through them. This is why there is such a maniacal fuss about inno-
vation. When management gurus drone on about the imperative of in-
novation, they are right. Firms still need excellence, quality of service,
reorganization, and real time, but nothing quite embodies the ultimate
long-term task in this new economy as the tornado of innovation.

This is where life lives, between the rigid death of planned order
and the degeneration of chaos. Too much change can get out of hand,
and too many rules — even new rules — can lead to paralysis. The best
systems have this living quality of few rules and near chaos. There is
enough binding agreement between members that they don't fall into
anarchy, yet redundancy, waste, incomplete communications, and inef-
ficiency are rife.

114 / New Rules for the New Economy

My own involvement in groups that launched successful change,
and my secondhand knowledge of many, many others involved in world-
changing innovation, convinces me that all of these ensembles teetered
on the brink of chaos at their peak performance. Whatever front they put
up to the public or investors, behind the scenes most of the group ran
around screaming "It's pathologically out of control here!" Every orga-
nization is dysfunctional to some degree, but innovative organizations,
in their moment of glory, tend to slide toward uncoordinated commu-
nication, furious bouts of genius, and life-threatening disorganization.
Everyone involved swears they will institute just enough structure to
prevent flameout in the future, but I've never seen radical innovation
emerge from an outfit that wasn't halfway to unraveling at the epicenter
of change. Most of the studies of optimal evolution in complex systems
confirm this view. The price for progressive change in maximum doses
is a dangerous (and thrilling) ride to the edge of disruption.

Although many groups experience these grand moments when cre-
ativity flows and things get done well, the holy grail in business and life
is to find ways to sustain these periods of supreme balance. Sustaining
innovation is particularly tricky since it flows out of creative disequilib-
rium.

To achieve sustainable innovation you need to seek persistent
disequilibrium. To seek persistent disequilibrium means that one must
chase after disruption without succumbing to it, or retreating from it.

A company, institution, or individual must remain perched in an
almost-falling state. In this precarious position it is inclined to fall, but
continually catches itself and never quite topples. Nor does it anchor
itself so that it cannot tip. It sort of skips along within reach of disaster,
but uses the power of falling to propel itself forward with grace. A lot of
people compare it to surfing; you ride a wave, which is constantly tum-
bling, and perched on top of this continually disintegrating hill of water,
you harness its turbulence into forward motion.

Innovation is hard to institutionalize. It often needs to bend the rules
of its own creation. Indeed, by definition innovation means to break
away from established patterns, which means that it tends to jump over

No Harmony, All Flux / 115

formulas. In periods of severe flux, such as the transition we are now in
between a resource-based economy and a connected-knowledge one,
change enters other levels.

Change comes in various wavelengths. There are changes in the
game, changes in the rules of the game, and changes in how the rules
are changed.

The first level — changes in the game — produces the kind of changes
now visible: new winners and losers. New businesses. New heroes. We
see the rise of Wa I -Marts, and of Nucor steelmaking.

The second level — changes in the rules of the game — produces new
kinds of business, new sectors of the economy, new kinds of games.
From this type of change comes the Microsofts and Amazon. corns.

The third level of change, which we are now entering, whips up
changes in how change happens. Change changes itself. While the new
economy provokes change in the first two levels — all those new busi-
ness and business sectors — its deepest consequence is the way it alters
change. Change accelerates itself. It morphs into creative destruction.
It induces flux. It disperses into a field effect, so you can't pinpoint
causes. It overturns the old ways of change.

Change in technological systems is becoming more biological. This
will take a lot of getting used to. Networks actually grow. Evolution can
really be imported into machines. Technological immune systems can
be used to control computer viruses. This neobiologicalism seeps di-
rectly into our new economy. More and more, biological metaphors are
useful economic metaphors.

The image of the economy as something alive is powerful. And it
is hardly New Age hokum. Adam Smith himself alluded to aliveness
with his unseen "hand." Karl Marx often referred to the organic nature
of the economy. Even the legendary no-nonsense economist Alfred
Marshall wrote in 1948 that "the Mecca of the economist lies in eco-
nomic biology." Marshall was writing at the peak of the industrial econ-
omy. The first stirrings of the coming power of information were just
being felt.

Living systems are notoriously hard to model and theorize about,

n6 / New Rules for the New Economy

and even more difficult to predict. Until very recently economics has
gravitated to an understanding that settled on an equilibrium, primarily
because anything more complex was impossible to calculate. Ironically,
the very same computer technology, which has roused flux in the econ-
omy, is now used to model it. With powerful chips, dynamic, learning,
self-feeding theories of the economy can be mapped out.

Both in our understanding of it, and in reality, the network economy
is a place that harbors little harmony or stasis. Instead, it is a system
that will increasingly demand flux and innovation. The art of judicious
change, of the dangerous difference, will be rewarded in full.

Strategies

Skate to the edge of chaos. Pay the price of radical churn: endorse
redundancy, inefficiency, and set the neatniks up in arms. If people
are not complaining about how chaotic the place is, you've got a prob-
lem. It isn't necessary that the whole organization be in chaos (one
hopes the accounting department is spared), but that key parts are. The
duty may want to be rotated. Realistically, disequilibrium is very difficult
to maintain.

Exploit flux instead of outlawing it. The traditional practice of tele-
phony tries to eliminate noise and uncertainty by creating an optimally
short and uninterrupted circuit between caller and callee. It assumes a
stable route. The internet, on the other hand, counts on chaotic change,
and it will overtake the entire phone system soon. It sends messages
(including voice) in fragmented bits scattered along redundant routes,
and then resends whatever the haphazard process loses to noisy lines.
Rather than prohibit errors, network logic assumes errors and learns
from the chaotic flux. Find where the flux is, and ride it.

You can't install complexity. Networks are biased against large-
scale drastic change. The only way to implement a large new system is
to grow it. You can't install it. After the collapse of the Soviet Union,
Russia tried to install capitalism, but this complex system couldn't be
installed; it had to be grown. The network economy favors assembling
large organizations from many smaller ones that keep their autonomy

No Harmony, All Flux / 117

within the large. Networks, too, need to be grown, rather than installed.
They need to accumulate over time. To grow a large network, one needs
to start with a small network that works, then add more sophisticated
nodes and levels to it. Every successful large system was once a suc-
cessful small system.

Preserve the core, and let the rest flux. In their wonderful bestseller
Built to Last, authors James Collins and Jerry Porras make a convinc-
ing argument that long-lived companies are able to thrive 50 years or
more by retaining a very small heart of unchanging values, and then
stimulating progress in everything else. At times "everything" includes
changing the business the company operates in, migrating, say, from
mining to insurance. Outside the core of values, nothing should be ex-
empt from flux. Nothing.

9 RELATIONSHIP TECH

Start with Technology, End
with Trust

The central economic imperative of the industrial age was to increase
productivity. Every aspect of an industrial firm — from its machines to
its organizational structure — was tailored to enhance the efficiency of
economic production. But today productivity is a nearly meaningless
byproduct in the network economy.

The central economic imperative of the network economy is to
amplify relationships.

Every aspect of a networked firm — from its hardware to its distrib-
uted organization — is created to increase the quantity and quality of
economic relationships.

The network is a structure to generate relationships. Networks haul
relations the way rivers once hauled freight. When everything is con-
nected to everything else, relationships are rampant. Each variety of
connection in a network begets a relationship. Between firms and other
firms. Between firms and customers. Between customers and the gov-
ernment. Between customers and other customers. Between employ-
ees and other firm's employees. Between customers and machines.
Between machines and machines, objects and objects, objects and cus-
tomers. There is no end to the complexity and subtlety of relationships
spawned in a network economy.

Each of these types of relationship has its own specific dynamics
and quirks. And each is nurtured by a particular type of technology. The
technologies of jelly bean chip and boundless bandwidth are, in the

Relationship Tech / 119

end, relationship technologies. "We need to shift away from the notion
of technology managing information and toward the idea of technol-
ogy as a medium of relationships," writes Michael Schrage in Shared
Minds, a book about the new technologies of collaboration. Despite the
billions of bits that information hardware can process in a second, the
only matter of consequence silicon produces are relationships.

Of course reputation and trust have been essential in all economies
of the past, so what's new? Only two things:

■With the decreased importance of productivity, relationships and
their allies become the main economic event.

■Telecommunications and globalism are intensifying, increasing,
and transforming the ordinary state of relationships into an excited
state of hyperrelations — over long distances, all the time, all places, all
ways. It's not Kansas anymore; it's Oz.

Relationships among more than two people can be structured as hier-
archies or as networks. In hierarchies, members are ranked in privilege rel-
ative to one another; in networks, members relate as peers — counterparts
of similar power and opportunity. In previous ages the most intelligent
way to construct a complex organization in the absence of plentiful infor-
mation was to build a hierarchy. Rank is a clever and workable substitute
for ubiquitous real-time information. When information is scarce, follow
orders.

When information is plentiful, peers take over.

In fact, as reliable information becomes common, almost noth-
ing can stop peers from taking over. As computers and communica-
tions unloose a million bits of information in every dimension, we see
peerages form in every dimension. Email and voice mail have brought
peerage pressure to corporations. The flattening effect of network tech-
nologies and the subsequent turmoil in the organization of business
firms is well recognized. But in many ways the emerging peerlike rela-
tionship between boss and staff is probably the least interesting and
least important of all the relational changes now taking place.

More consequential is the relation between customer and firm,

120 / New Rules for the New Economy

which is yielding to the peer effect. More important still is the relation
between firm and firm, which is shifting rapidly to a web of overlap-
ping nets. Still more vital is the lateral relation between customer and
customer, which is just beginning to brew. Finally, the elevated relation
between customers (rather than citizens) and the rest of society, a re-
lation that is just now being defined, may be the most important of
all, as economics elbows its way into every activity. As an example of
expanding relationships, consider the traditional relationship between
customer and a firm, roles that have been around forever. In the net-
work economy the separation between customers and a firm's employ-
ees often vanishes.

When you pump your own gas at the filling station, are you working
for the gas station or for yourself? Are all those people waiting in line
behind the ATM machine more highly evolved bank customers or just
nonpaid bank tellers? When you take a pregnancy test at home, are you
a savvy self-helper, or part of the HMO's plan to reduce costs? The an-
swer, of course, is both. When everyone is linked into a web, it's impos-
sible to tell which side you are on.

Web sites and 800 numbers can invite customers into the internal
knowledge banks of a company to almost the same degree of "inside"
that employees stationed on the other side of the line enjoy. Many tech-
nical companies post the same technical information and diagnostic
guidelines on their help sites that their own support professionals work
from when you call their hotline. You can have someone trained to look
up and then read troubleshooting answers for you, or if you are in a
hurry, you can try to find it yourself. Who's working for whom?

At the same time the complexity of an employee contract, particularly
in high-tech fields, is quickly approaching the complexity of a contract
with an outside vendor. Stock options, vestment periods, a thousand
insurance and benefit combinations, severance clauses, noncompete
agreements, performance goals — each one uniquely negotiated for each
person. A highly paid technical employee becomes in essence a perma-
nent consultant. He or she is an outsider on staff.

Outsiders act as employees, employees act as outsiders. New re-
lationships blur the roles of employees and customers to the point of
unity. They reveal the customer and company as one.

Relationship Tech / 121

This close coevolution between users and producers is more than
poetry. There is a very real sense in which the owners of the phone
network sell nothing at all but the opportunity for customers to have
conversations among themselves — conversations which the users
themselves create. You could say the phone companies cocreate phone
service. This blurring between origin and end spills over into the birth of
online services, such as AOL, where most of what is now sold is being
created by the customers themselves in the form of postings and chat.
It took years for AOL to figure this out; they initially wanted to follow
industrial logic and sell downloadable information created at great ex-
pense by professionals. But once they realized that the customers acted
like employees by making the goods themselves, the online companies
started making money.

The net continues to break down the old relationships between pro-
ducers of goods and consumers of services. Now, producers consume
and consumers produce.

In the network economy, producing and consuming fuse into a sin-
gle verb: prosuming.

"Prosumer" is a term coined by Alvin Toffler in 1970 in his still-
prescient book Future Shock. (Toffler first found his insights as a futurist
while working for the telephone networks.) Today prosumers are every-
where, from restaurants where you assemble your own dinner, to medi-
cal self-care arenas, where you serve as doctor and patient.

The future of prosumerism can be seen most clearly online, where
some of the very best stuff is produced by the people who consume it.
In a multiplayer game like Ultima Online, you get a world with a view
and some tools and then you're on your own to make it exciting. You
invent your own character, develop his or her clothing or uniform, ac-
quire unique powers, and build the surrounding history. All the other
thousands of characters you interact with have to be sculpted by other
prosumers. The adventures that unfurl are cocreated entirely by the
participants. Like a real small town, the joint experience — which is all
that is being sold — is produced by those who experience it.

These eager world makers could be viewed as nonpaid content mak-
ers; in fact, they will pay you to let them make things. But the same

122 / New Rules for the New Economy

world could also be viewed as full of customers who have been given
tools with which they can complete a product to their own picky speci-
fications. They are rolling their own, just as they like. In the new econ-
omy-speak, this is known as mass customization.

The premise of mass customization is simple. Technology allows
us to target the specifications of a product to a smaller and smaller
group of people. First we can make Barbie dolls in the millions. Then
with more flexible machinery and computer-generated target market-
ing we can make ethnic Barbies, in the hundreds of thousands. Then
with improved market research and advanced communications we can
make subculture Barbies, biker and grunge Barbies in the thousands.
Eventually, with the right network technology, we can make the personal
Barbie, the Barbie of you. In fact there is a company in Littleton, Colo-
rado, that currently makes the "My Twinn" baby doll to look like the
doll's owner. The doll's eye and hair color and hair style are matched to
a photo of the child who will own it.

The most interesting aspect of prosuming and mass customiza-
tion — of this new relationship between the customer and the firm — is
that because customers have a hand in the creation of the product they
are more likely to be satisfied with the final result. They have taught the
firm how to please them, and the firm now has a customer with a much
fuller relationship with them than before.

But creating a product for "a niche of one" is only a small part of
the transformation of the customer relationship. (Detroit car mak-
ers learned long ago to create customized cars, but that was all they
learned.) Network technologies such as data mining, smart cards, and
recommendation engines are escalating the levels of relationships
available to customers.

The drive to relate to the consumer intimately, to the point of encour-
aging prosuming, can be articulated as a series of progressive goals:

1) to create what the customer wants

2) to remember what the customer wants

3) to anticipate what the customer wants

4) finally, to change what the customer wants

Each of the missions elevates the firm's commitment to the cus-

Relationship Tech / 123
tomer and raises the customer's involvement with the firm.

■ To create what the customer wants. Sometimes this will mean sim-
ple customization: You want a vacation experience unlike anyone else's.
Sometimes this will mean mass customization: You want a pair of
jeans that fit your unusual leg shape at the same price as a regular pair
of jeans. Sometimes mass customization is not what you want. The
huge fashion industry makes its fortune on people's dependable desire
for wearing what everyone else is wearing. Sometimes what you want is
semicustomized: You read the New York Times because everyone else is
reading it, but you don't read the sports section or the obits. You want
not the Daily Me, but the Daily You and Me, the publication your 12 clos-
est friends read.

A huge tide of information and trust must flow between users and
creators in order to create exactly what the customer wants. The inter-
face technology must be clear and simple for people to convey their
desires. The nightmarish logistics of delivery and production must be
managed with exactness. The most difficult aspect of this mission may
not be the order form but the manufacturing; anything that involves at-
oms is much harder to customize than first thought. But any solutions
surely involve networked technologies.

■ To remember what a customer wants. A majority of the things we
do, we do repetitively. We engage in the same tasks every day, or once
a week, or every now and then. Things done iteratively have different
dynamics from things done once. Little events become important. We
bristle at having to remember our password again, or having to recite
how we like our coffee one more time, or having to explain again what
we don't like about bathing suits. Humans who learn our quirks (and
they must be learned) earn our favor. Firms who learn our quirks will
also earn our favor.

The technology of tracking and interpreting our whims heightens
the relationships between firm and consumer. The firm must expend
great effort to remember your preferences, but you also expend effort
in teaching them so they can remember. And the remembering must be
intelligent. You order the same espresso every day, except when it's cold
out, and then you order a latte. The relationship tech has to be robust

124 / New Rules for the New Economy

enough to be taught these distinctions.

Don Peppers and Martha Rogers, authors of the amazingly insightful
Enterprise One to One, state: "A Learning Relationship between a customer
and an enterprise gets smarter and smarter with every individual inter-
action, defining in ever more detail the customer's own individual needs
and tastes. Every time a customer orders her groceries by calling up last
week's list and updating it, for instance, she is in effect 'teaching' the ser-
vice more about the products she buys and the rate at which she con-
sumes them." In reward for the firm's effort at being taught, the firm and
the customer develop a committed relationship. Peppers and Rogers con-
tinue: "The shopping service will develop a knowledge of this particular
customer that is virtually impossible for a competitive shopping service
to duplicate, providing an impregnable lock on the customer's loyalty."
At the same time, the customer has invested so much in the relationship
that the cost of switching to another vendor gets steeper by the day. Pep-
pers and Rogers: "When the florist sends a note reminding you of your
mother's birthday, and offers to deliver flowers again this year to the same
address and charged against the same credit card you used with the florist
last year, what are the chances that you will pick up the phone and try to
find a cheaper florist?"

Since a relationship involves two members investing in it, its value
increases twice as fast as one's investment.

The cost of switching relationships is high. Leaving, you surrender
twice. You give up all that the other has put into the relationship, and
you give up your own investment. In other words, the cost of loyalty is
low. Thus we see the huge success of frequent flyer and frequent buyer
programs, made possible by the coinvestment that airlines and super-
markets put into them. Affiliation cards are another example of the rela-
tionship extension; the costs of tracking purchases are so low compared
to the value of belonging — for both sides — that it pays to invent other
ways to spread the idea. And the phone companies' attempts at "friends
of friends" calling circles are likewise clever experiments in exploiting net-
worked relationships.

Smarter relationship technology, or "R-tech" as economist Albert
Bressand calls it, will bind the connections between customers and

Relationship Tech / 125

firms more tightly still. An emerging standard called P3P offers a uni-
form way to store an individual's profile containing name, address, and
so forth as well as preferences, including preferences of what they will
reveal. If you shop a lot you will carry a "passport profile" based on the
P3P protocol (or one similar) encased in your smart card or online in
a browser. You exchange it with the vendor during a commercial trans-
action. The passport technology will help firms remember you as you
teach them how to serve you and earn your favor.

The portability of preferences is a big deal. As the net creeps into yet
more aspects of commerce, the ability to track identities and desires
across different systems will be key. The Ritz-Carlton Hotel is justifiably
proud of its ability to customize rooms for you anywhere in its thirty-
one-hotel chain, without having to ask you. Some airlines can do the
same. That still leaves a lot of room for success in creating relation-
ships in the network economy as a whole.

■ To anticipate what a customer wants. Creating tailored products for
people is the first step of R-tech. The second is recalling their prefer-
ences intelligently. The third step is anticipating what they'll want even
before they articulate it. That's a measure of any great relationship. You
can boast you really know someone when you can say, "I know she'll
love this book!"

The most elemental form of anticipatory tech extrapolates likes and
dislikes from the customer's past usage patterns. But the most powerful
forms of R-tech rely on the swarm of other customers and the latent re-
lationships between them to anticipate desires. A great example of this
social R-tech was developed by Firefly, a web-based recommendation
engine (recently sold to Microsoft). Here's how it works in brief: I tell
MyLaunch, Firefly's musicvendor, myten favorite musicalbums. It takes
my recommendations and compares them with the top ten recommen-
dations of 500,000 other Firefly members interested in music. Firefly
then figures out where in "taste space" I belong. It places me near the
few people who like the same albums I do. Despite an overlap of taste
with them there will be a few albums my neighbors mentioned that I
did not. Firefly will alert me to those albums, and conversely will tell
my taste neighbors about the albums I mentioned that they had not.
These are the albums I should try because it anticipates I will like

126 / New Rules for the New Economy

them.

It's remarkable how well this simple system works. I eerily recom-
mended great albums that I liked. There are many refinements to in-
crease its power. I can "teach" the system by grading the results it gave
me. Perhaps it recommended Pete Seeger because I named Bob Dylan
as a favorite. But say I happen to already know Seeger's work and can't
stand him, so I tell it to forget Seeger (and thus Seeger-likes). It's now
smarter. I can further locate my space with more precision by rating as
many albums as I wish, indicating my love or hate of them. (A strong
negative rating is just as useful as a strong positive rating.) Because it
is the web, I also have the option of listening to music selections to re-

fresh my memory or evaluate recommended candidates.

The real power of this system lies not in mere recommendation,
but in its ability to create relationships among its 3 million registered
users. It allows members to link up with their taste-neighbors. All the
fans of ambient music, or early Seattle grunge, are encouraged to strike
up conversations in "venues," or start mail lists, or simply introduce
themselves. Out of this technology is born yet another relationship:
self-identity.

Most listeners don't have easily classifiable tastes. They're fans of
Nirvana, U2, The Beatles, Joni Mitchell, and Nine Inch Nails. They'll
have neighbors in an obscure unnamed space — the Beatles/U2/Nin-
elnchNails space. Through Firefly, these folks can identify their tastes
by the microcommunity of like-minded folks they create for themselves.
What Firefly can do with music, it can also do with books. And mov-
ies. And web pages. (Firefly recently spun each of these domains out to

People who share small

★

preferences for particular
books or movies in a single
"taste space" can use their
collaborative sorting to aid
them in future purchases.

Peers in Tastespace

> *

Relationship Tech / 127

separate partners.) They are rated in the same way, with equally useful
results. But now the combined media space is tremendously potent.
Weird subcultures can be detected long before they have a name. Read-
ers of Anne Rice vampire novels who like country and western music
and Woody Allen movies suddenly realize they are a group! Self-recog-
nition is the first step toward influence.

Online booksellers such as Amazon.com and Barnes and Noble are
using similar R-technology to sell more books, and to make customers
smarter shoppers. Amazon derives its collaborative recommendations
from customers who have a purchasing behavior similarto yours. Based
on what you have bought in the past, and what others have bought in
the past, Amazon advises: Dear reader, you should like these titles. And,
they are usually right. In fact, their recommendations are so handy that
they are Amazon's prime marketing mechanism and their chief source
of revenue growth. According to company spokespersons, "significant"
numbers of users buy additional books — on impulse — because of the
co-recommendations that pop up when you inspect a book.

Evan Schwartz, author of Webonomics, goes so far as to suggest that
firms such as Amazon should be viewed as primarily selling intangible
relationships. "Amazon should not be compared to actual stores sell-
ing books. Rather . . . the value that Amazon adds is in the reviews, the
recommendations, the advice, the information about new and upcom-
ing releases, the user interface, the community interest around certain
subjects. Yes, Amazon will arrange to deliver the book to your door, but
you as a customer are really paying them for the information that led
to your purchase." When you log on to Amazon you get a relationship
generator, one that increasingly knows you better.

The beauty of network logic is that the mechanics of this software
does not rely on artificial intelligence, or Al. Rather the collaborative
work is done by pooling the teaching that each person would do alone
into one distributed base. It's an example of dumb power. Lots of people
teaching a dumb program, but all connected together, producing use-
ful intelligence. The strength of the network is built by the slim bits of
information that each member is willing to share. Sometimes that's all
it takes.

The web is a hotbed of innovations in R-tech. If you had success in
a search and are willing for that information to be spread collectively

128 / New Rules for the New Economy

to others, this lateral relationship can improve the search function for
everyone. Sometimes called "collaborative filtering" these kinds of so-
cial network functions will spread widely within the web itself, as well as
within companies and small work groups.

As in other technological evolutions, relationship tech will begin its
innovation in the avant garde, then work back to the familiar.

R-tech first appears in the world of the web, but will gradually infil-
trate the world of canned goods and sports equipment, as well as TV
shows and vacation spots. Eventually it reaches the final stage in the
progression of customer relations:

■ To change what a customer wants. The ongoing tango between cus-
tomer and provider draws them together until their identities disappear
at times. This is especially true in frontier arenas, where expertise is usu-
ally in short supply. At first this is no authority on what customers want
or what providers should deliver — as in these early days of the web and
e-commerce. Expertise has to be developed jointly, coevolved. Custom-
ers must be trained and educated by the company to teach them what
they need, and then the company is trained and educated by the cus-
tomers. We saw precisely this equation in the pioneer days of online
conferencing about a decade ago. When email and chat began, no one
knew the difference between great email and okay email, between fab-
ulous chat areas and average chat areas. The best online companies
learned all they knew from their first customers. But the customers,
too, had little expertise of what to expect and so relied on the visions
and vaporware suggested by the companies. Customer and company
educated each other on what was possible.

Good products and services are cocreated: The desires of customers
grow out of what is possible, and what is possible is made real by com-
panies following new customer desires. Because creation in a network
is a cocreation, a prosumptive act, a multifaceted relationship must ex-
ist between the cocreators.

Cocreation and prosumption require an information peerage. Infor-
mation must flow symmetrically to all nodes. In the industrial society,
the balance of information inevitably sided with corporations. They had

Relationship Tech / 129

centralized knowledge while the customer had only their own solo expe-
rience divorced from that of all but a few friends. The coming network
economy has changed that. Each new layer of complexity and technol-
ogy shifts the action toward the individual.

The intent of networked technology is to make the customer smarter.
This may require sharing previously proprietary knowledge with the
customer. It may also be as simple as sharing what the company knows
about the customer with the customer herself.

R-tech tries to rebalance the traditional asymmetrical flow of infor-
mation, so that the customer learns as fast as the firm (and so the firm
learns as fast as the customer). At first the idea of focusing on "learning
customers" instead of the "learning company" seems misplaced. But it
is part of the larger shift away from a view of the firm as a standalone
unit and toward a view of the firm as an interacting node in a much
larger network — a diffuse node made up of customers as well as em-
ployees.

Letting the customer learn with help from the firm is not the only
way to make the customer smarter. The other way is to reverse the usual
flow of information in the market. John Hagel, co-author of Net Gain,
says, "Instead of helping your firm capture as much information about
the customer as you can, you want the customer to capture as much
information about themselves as they can." And you want customers to
capture as much information about the firms they are dealing with as
well. There are several ways on the web to bias information toward the
customer. Among the most exciting innovations are new vendors that
send a bot around to comparison shop for you. If thirty music retailers
online offer the soundtrack to the movie Titanic for sale, web sites such
as Junglee or Jango will collect the offers from each vendor, and rank
them for you. But the vendors are calling the shots; they craft the offer,
keep the data of requests, and drive the sale.

By reversing the direction of information flow one can create a "re-
verse market." In a reverse market (already set by a few web sites), the
customer dictates the terms of sale. You say, "I'd like to buy a Titanic
CD for $10, new." You broadcast your offer into the web, and then the
vendors come to you. This works best at first for high-ticket items such
as cars, insurance, and mortgages. "I'd like a $120,000 thirty-year mort-
gage for my house in San Jose. I can pay $1,000 per month. Do I have any

130 / New Rules for the New Economy

takers?" You set the terms, keep the data, and drive the transaction.
Technology, of course, means that much of this negotiation happens in
the background via agents and so forth; you don't have to do the hag-
gling yourself. But the R-shift moves the capture of information into the
hands of customers from those of the vendors. It makes the customer
smarter.

And whoever has the smartest customers wins.

The third way to make the customer smarter is by connecting cus-
tomers into a collective intelligence.

When personal computers first entered the marketplace in the mid
1970s, user groups sprung up everywhere to assist the perplexed. Any-
one could attend a monthly meeting and swap useful tips about how
to set up a printer, or get an upgrade program to work. It was all infor-
mal, and free, and democratic; those who knew, told; those who didn't
know, asked questions and took notes. Each specific computer platform
spawned local user groups in major cities. There were user groups for
"orphan" equipment such as Amigas, and video game consoles, and of
course for Macs and DOS-based PCs. Some user groups grew to have
tens of thousands of members and some ran their own free software

Firms that encourage
customers to talk to each other,
to form affinity groups and
hobby tribes, will breed smarter
and more loyal customers while
creating smarter products and
services.

emporiums and had budgets in the millions of dollars.

User groups were seen by the outside world as evidence of the lousy
state of the computer industry. Manuals were horrible, interfaces un-
friendly. Critics complained that you didn't need to join a user group
to get your TV up and running, or to turn your dishwasher on. Yet for

Relationship Tech / 131

many computer wanna-bes, the shared knowledge of a user group was
essential in starting the journey into computerdom, or later onto the
net and the web.

In reality, user groups were not a sign of failure but a sign of intelli-
gence. They were a means of making the consumer smarter. Some com-
puter companies caught on to this reality early and made regular visits
to the bigger user groups to answer questions and hear complaints and
pick up suggestions. The user group, although independent and non-
profit, became part of the computer companies' extended self.

Today there are still some 2,000 Mac and PC user groups that offer
regular meetings in the United States (and an equal number internation-
ally). The Berkeley Mac User Group still boasts 10,000 members, and
weekly meetings. Yet most user group action has shifted to the online
space. Web sites with attendant conversation areas, FAQ (Frequently
Asked Questions) archives, mail lists, and public bulletin boards all
keep the distributed exchange of knowledge going.

A user group is a peerage of responsibility. Group members take edu-
cation into their own hands, and distribute the job of keeping up among
themselves. It's long been appreciated that the best and most useful
working knowledge about technical gear comes out of user groups. User
groups are now a regular feature for avocations such as scuba diving,
bicycling, saltwater aquariums, hot-rod cars, or any hobby where techno-
logical change seems to outrun understanding.

The most fanatical of user groups can be thought of as "hobby
tribes," a phrase coined by science fiction writer David Brin. Hobby
tribes are very informed, very connected, very smart customers. They
band their enthusiasms together and become the experts. In some
smaller niches they become the market, too.

Expertise now resides in fanatical customers. The world's best ex-
perts on your product or service don't work for your company. They are
your customers, or a hobby tribe.

Companies need user groups almost as much as users need them.
User groups are better than advertising when customers are happy, and
worse than cancer when they are not. Used properly, aficionados can
make or break products.

132 / New Rules for the New Economy

The network economy has the potential to enable a civilization of
aficionados. As customers get smarter, the locus of expertise shifts to-
ward affiliates and home-brew groups, and away from large corpora-
tions or the solo academic professional. If you really want to know what
works, or where to find it, ask a hobby tribe. And not just in the realm
of high-tech knowledge. All knowledge is pooling into aficionados. Be-
cause of shared obsessions among horse lovers, there are more horse-
shoers working today than a hundred years ago, in the age of cowboys.
There are more blacksmiths making swords and chain mail armor this
year than ever worked in the medieval past. A network of aficionados is
already here.

The net tends to dismantle authority and shift its allegiance to peer
groups. The cultural life in a network economy will not emanate from
academia, or the cubicle of corporations, or even primetime media.
Rather, it will reside in the small communities of interest known as
fans, and 'zines, and subcultures. In Future Shock Alvin Toffler sets the
stage: "Like a bullet smashing into a pane of glass, industrialism shat-
ters societies, splitting them up into thousands of specialized agencies
. . . each subdivided into smaller and still more specialized subunits. A
host of subcults spring up; rodeo riders, Black Muslims, motorcyclists,
skinheads, and all the rest." That initial shatter is now several thou-
sands of subcultures. For every obsession in the world, there is now a
web site. What industrialization began by shattering, the network econ-
omy completes by weaving together and serving with great attention.
The web of broken shards is now the big picture.

Information shifts toward the peerage of customers, so does respon-
sibility for success. The net demands wiser customers.

The advent of relationship technologies on the net creates a larger
role for the customer, and it puts more demands on the consumer, too.
None of this enlargement of relationships can happen unless there are
vast amounts of trust all around. "The new economy begins with tech-
nology and ends with trust," says Alan Weber, founder of the new econ-
omy business magazine Fast Company.

If you send all your workers home to telecommute, you'll need a
whopping lot of trust between you and your workers for that relocation

Relationship Tech / 133

to succeed. If I tell Firefly all the books I read, all the movies I watch,
and all the web sites I visit, I will require a high degree of trust from
them. If Compaq lets me delve into its expensively compiled knowledge
database of known bugs and problems with certain computer parts, it
has to trust me.

Trust is a peculiar quality. It can't be bought. It can't be downloaded.
It can't be instant — a startling fact in an instant culture. It can only ac-
cumulate very slowly, over multiple iterations. But it can disappear in a
blink. Alan Weber compares its accretion to a conversation: "The most
important work in the new economy is creating conversations. Good
conversations are about identity. They reveal who we are to others. And
for that reason, they depend on bedrock human qualities: authenticity,
character, integrity. In the end, conversation comes down to trust."

A conversation is a pretty good model for understanding what is go-
ing on in the network economy. Some conversations are short, abrupt ex-
changes of minimal data; some are antagonistic, some are periodic, some
are continuous, some are long-distance, some are face to face. A back-
and-forth exchange starts between two people, and then spills over to
several people, and as the conversation becomes multipronged and
divergent, it gathers in more and more players. Eventually there are
conversations between firms and objects as well as people, as more
of the world's inanimate artifacts become connected. Increased anima-
tion increases the number or times of interaction, and the frequency
of conversation. The more interactions, the more important learning
becomes, the more essential relationships become, the more trust be-
comes a factor. Trust becomes what Weber calls "a business impera-
tive."

But for all the talk of the importance of trust, it only comes at a
price. It comes slow and it always comes awkwardly. "Trust can be
messy, painful, difficult to achieve, and easy to violate," writes Weber.
"Trust is tough because it is always linked to vulnerability, conflict, and
ambiguity. For managers steeped in rationalism, hierarchies, rule-based
decision making, and authority based on titles, this triad of vulnerabil-
ity, conflict, and ambiguity threatens a loss of control."

The technologies of relationships will not ease this fear or pain. They
can strengthen and diversify relationships and trust, but not make them
automatic, easy, or instant. At the forefront in the chore to cultivate

134 / New Rules for the New Economy

trust — as a business imperative — stands the rugged hurdle of privacy.
No other issue summarizes the unique opportunities and challenges of
the network economy as much as privacy does.

Privacy concerns were once exclusively aimed at Big Brother govern-
ment, but net residents quickly realized that commercial entities — the
little brothers on the net — were more worrisome. James Gleick, a tech-
nology correspondent for the New York Times put it this way: "Whatever
the Government may know about us, it seems that the network itself —
that ever-growing complex of connections and computers — will know
more. And no matter how much we bristle at the idea, we nevertheless
seem to want services that the network can provide only if it knows."

An entire book could be written about the fundamental conversation
between what we want to know about others and what we want others
and the net itself to know about us. But I will make only a single point
about privacy in space of an emerging new economy:

Privacy is a type of conversation. Firms should view privacy not as
some inconvenient obsession of customers that must be snuck around
but more as a way to cultivate a genuine relationship.

The standard rejoinder by firms to objections from customers for
more personal information is, "The more you tell us, the better we can
serve you." This is true, but not sufficient. An individual can't comfort-
ably divulge unless there is trust.

Take the trust many people feel in a small town. The interesting
thing about a small town is that the old lady who lived across the street
from you knew every move you made. She knew who came to visit you
and what time they left. From your routine she knew where you went,
and why you were late. Two things kept this knowledge from being of-
fensive: 1) When you were out, she kept an eye on your place, and 2)
you knew everything about her. You knew who came to visit her and
where she went (and while she was gone you kept an eye on her place).
More important, you knew that she knew. You were aware that she kept
an eye on you, and she knew that you watched her. There was a sym-
metry to your joint knowledge. There was a type of understanding, of
agreement. She wasn't going to rifle through your mailbox, and neither
would you peek in hers, but if you had a party and someone passed out

Relationship Tech / 135

on the porch, you could count on the neighborhood knowing about it
the next day. And vice versa. The watchers are watched.

One of chief chores in the network economy is to restore the sym-
metry of knowledge.

For trust to bloom, customers need to know who knows about them,
and the full details of what they know. They have to have knowledge
about the knower equal to what the knower knows about them. I would
be a lot more comfortable with what the credit companies knew about
me if I knew with great accuracy what they knew about me, how they
know it, and who else they told. And I'd be even more at ease if I de-
rived some compensation for the value they get for knowing about me.

Personally, I'm happy for anyone to track all my activities 24 hours a
day, as long as I have a full account of where that information goes and
I get paid for it. If I know who the watchers are, and they establish a re-
lationship with me (in cash, discounts, useful information, or superior
service, or otherwise), then that symmetry becomes an asset to me and
to them.

We see the first inklings of this trust machinery in protocols such as
Truste. Truste was founded in 1995 as a nonprofit consortium of web
sites and privacy advocates to enhance privacy relationships in the on-
line marketspace. They have developed an information standard also
called Truste. The first stage is a system of simple badges posted on
the front pages of web sites. These seals alert visitors — before they en-
ter — of the site's privacy policies. The badges declare that either:

■We keep no records of anyone's visit. Or,

■We keep records but only use them ourselves. We know who you
are so that when you return we can who show you what's new, or tailor
content to your desires, or make purchase transactions easier and simpli-
fied. Or,

■ We keep records, which we use ourselves, but we also share knowl-
edge with like-minded firms that you may also like.

Those three broad approaches encompass most transactions; but
there are as many subvariations as there are sites. (To post the badges

136 / New Rules for the New Economy

or seal, sites must submit to an audit by Truste, which guarantees to the
public that a site does adhere to the policies they post.) But the seals
are only labels. The real work happens behind the scenes by means of
very sophisticated R-tech.

Here is a hypothetical scenario of a visit to a Truste-approved com-
merce site a couple of years hence. I visit the Gap clothing store online.
They notify me that they are a level 2 site; they remember who I am, my
clothes size, and what I bought or even inspected last time I visited —
but they don't sell that data. In exchange for information about myself,
they offer me a 10% discount. Fine with me! Makes life easier. I visit
the site of Raven Maps, the best topographical maps in the world. They
let me know that my visit with them is on a level 3 basis — they trade
my name and interests, but nothing else, with other travel-related sites,
which they conveniently list. In exchange they will throw in one free map
per purchase. Since the friends of Raven Map look very intriguing, I say
yes. I visit CompUSA. They want to know everything about me, and they
will sell everything about me, level 3. In exchange, they will lease me
a multimedia computer with all the bells and whistles for free. Okay?
Ummm, maybe. Then I visit ABC, the streaming video TV place. They
declare that they keep no records whatsoever. Whatever shows I watch,
only I know. They keep aggregate knowledge, which they use to lure ad-
vertisers, but not specifics. A lot of people are attracted to this level 1
total nonsurvelliance, despite the heavy dose of commercials, and keep
coming back.

At the end of the month I get a privacy statement, similar in format
to a credit card statement. It lists all the deals and relationships I have
agreed to that month and what I can expect. It says I agreed to give the
Gap particular personal information, but that information should go no
further than them. I gave a pretty detailed personal profile to Raven and
the three companies they gave it to show up on my statement. Those
three have a one-time use of my data. Raven owes me a map. In the end
I gave CompUSA my entire profile. I am owed a computer. The nine ven-
dors they sold my info to also show up; they have unlimited use of my
profile and CompUSA web site activities. I'll get junk mail from those
nine for a while — but my new computer will be able to filter it all out! In
addition, I made a deal with the New York Times which lets them keep
my reading activities, but nothing else, for a free month's subscription.

Relationship Tech / 137

Also, my statement shows that American Airlines got my address from
ABC, when they claimed level 1. I'll have to have my privacy bot contact
them and sort that "mistake" out.

Caller ID, unlisted phone numbers, unlisted email address, indi-
vidual-free aggregates, personally encrypted medical records, passport
profiles, temporary pseudonym badges, digital signatures, biometric
passwords, and so on. These are all the technologies we'll be using to
sort out the messy business of creating relationships and trust in a net-
work economy.

If only we knew precisely what relationships were. Industrial produc-
tivity was easy to measure. One could ascertain a clear numerical an-
swer. Relationships, on the other hand, are indefinite, fuzzy, imprecise,
complex, innumerate, slippery, multifaceted. Much like the net itself.

As we create technologies of relationships we keep running into the
soft notions of reputation, privacy, loyalty, and trust. Unlike bit or baud,
there's no good definition of what these concepts mean exactly, though
we have some general ideas. Yet we are busy engineering a network
world to transmit and amplify reputations and loyalty and trust. The
hottest, hippest frontiers on the net today are the places where these
technologies are being developed.

The network economy is founded on technology, but can only be
built on relationships. It starts with chips and ends with trust.

Ultimately the worth of a technology is judged by how well it fa-
cilitates an increase in relational activity. VR pioneer Jaron Lanier has
proposed the Connection Test: Does a technology in question connect
people together? By his evaluation telephones are good technology,
while TV is not. Birth control pills are, while nuclear power is not.

By this measure, network technology is a great deal. It has the po-
tential to link together all kinds of sentient beings in every imaginable
way, and more. The imperative of the network economy is to maximize
the unique needs and talents of individual beings by means of their re-
lationships with many others.

That means not being connected at times. Silence is often an appro-
priate response in a conversation. Privacy is often advantageous in a net-
worked world. The dimensions of relationship extend into not knowing as

138 / New Rules for the New Economy

well as into the known. It is one of many mysteries in the human condi-
tion that will be wired into the technologies of the network economy.

Strategies

Make customers as smart as you are. For every effort a firm makes in
educating itself about the customer, it should expend an equal effort in
educating the customer. It's a tough job being a consumer these days.
Any help will be rewarded by loyalty. If you don't educate your customer,
someone else will — most likely someone not even a competitor. Almost
any technology that is used to market to customers, such as data min-
ing, or one-to-one techniques, can be flipped around to provide intel-
ligence to the customer. No one is eager for a core dump, but if you can
remember my trouser size, or suggest a movie that all my friends loved,
or sort out my insurance needs, then you are making me smarter. The
rule is simple: Whoever has the smartest customers wins.

Connect customers to customers. Nothing is as scary to many cor-
porations as the idea of sponsoring dens in which customers can talk
to one another. Especially if it is an effective place of communication.
Like the web. "You mean," they ask in wonder, "we should pay a mil-
lion dollars to develop a web site where customers can swap rumors
and make a lot of noise? Where complaints will get passed around and
the flames of discontent fanned?" Yes, that's right. Often that's what
will happen. "Why should we pay our customers to harass us," they
ask, "when they will do that on their own?" Because there is no more
powerful force in the network economy than a league of connected cus-
tomers. They will teach you faster than you could learn any other way.
They will be your smartest customers, and, to repeat, whoever has the
smartest customers wins.

Just recently E-trade, the pioneering online stock broker, took the
bold step of setting up an online chat area for its customers. We'll see
more smart companies do this. Whatever tools you develop that will aid
the creation of relationships between your customers will strengthen the
relationship of your customers to you. This effort can also be thought of
as Feeding the Web First.

All things being equal, choose technology that connects. Technol-

Relationship Tech / 139

ogy tradeoffs are made daily. A device or method cannot be the fastest,
cheapest, more reliable, most universal, and smallest all at once. To
excel, a tech has to favor some dimensions over others. Now add to
that list, most connected. This aspect of technology has increasing im-
portance, at times overshadowing such standbys as speed and price. If
you are in doubt about what technology to purchase, get the stuff that
will connect the most widely, the most often, and in the most ways.
Avoid anything that resembles an island, no matter how well endowed
that island is.

Imagine your customers as employees. It is not a cheap trick to get
the customer to do what employees used to do. It's a way to make a
better world! I believe that everyone would make their own automobile
if it was easy and painless. It's not. But customers at least want to be in-
volved at some level in the creation of what they use — particularly com-
plex things they use often. They can superficially be involved by visiting
a factory and watching their car being made. Or they can conveniently
order a customized list of options. Or, through network technology,
they can be brought into the process at various points. Perhaps they
send the car through the line, much as one follows a package through
FedEx. Smart companies have finally figured out that the most accurate
way to get customer information, such as a simple address, without er-
ror, is to have the customer type it themselves right from the first. The
trick will be finding where the limits of involvement are. Customers are
a lot harder to get rid of than employees! Managing intimate customers
requires more grace and skill than managing staff. But these extended
relationships are more powerful as well.

The final destiny for the future of the company often seems to be the
"virtual corporation" — the corporation as a small nexus with essential
functions outsourced to subcontractors. But there is an alternative vi-
sion of an ultimate destination — the company that is only staffed by cus-
tomers. No firm will ever reach that extreme, but the trajectory that leads
in that direction is the right one, and any step taken to shift the balance
toward relying on the relationships with customers will prove to be an
advantage.

1 OPPORTUNITIES BE-
FORE EFFICIENCIES

Don't Solve Problems;
Seek Opportunities

Until Charles Darwin's discovery of evolution, life was surveyed in the
present tense. Animals were probed to see how their innards worked,
plants dissected for useful magical potions, the creatures of the sea
investigated for their strange lifestyles. Biology was about how living
organisms thrived day to day.

Darwin forever transformed our understanding of life by insisting
that life didn't make sense without the framework of its billion-year evo-
lution. Darwin proved that even if all we wanted to know was how to
cure dysentery in pigs, or how best to fertilize corn, or where to look for
lobsters, we had to keep in mind the slow, but commanding dynamics
of life's evolution over the very long term.

Until recently, economics was about how businesses thrived year to
year, and what kind of governmental policy to institute in the next quar-
ter. The dynamics of long-term growth are quite remote from the issues
of whether the money supply should be tightened this year. The study
of economics has no Darwin yet, but it is increasingly clear that the be-
havior of everyday markets cannot be truly understood without keeping
in mind the slow, but commanding dynamics of long-term economic
growth.

Over the long run, the world's economy has grown, on average, a
fractional percent per year. During the last couple of centuries it aver-
aged about 1% per year, reaching about 2% annually this century, when
the bulk of what we see on earth today was built. That means that each
year, on average, the economic system produces 2% more stuff than
was produced in the previous 12 months. Beneath the frantic ups and

Opportunities Before Efficiencies / 141

downs of daily commerce, a persistent, invisible swell pushes the entire
econosphere forward, slowly thickening the surface of the earth with
more things, more interactions, and more opportunities. And that tide
is accelerating, expanding a little faster each year.

At the genesis of civilization, the earth was mostly Darwin's realm —
all biosphere, no economy. Today the econosphere is huge beyond com-
prehension. If we add up the total replacement costs of all the roads in
every country in the world, all the railways, vehicles, telephone lines,
power plants, schools, houses, airports, bridges, shopping centers (and
everything inside them), factories, docks, harbors — if we add up all the
gizmos and things humans have made all over the planet, and calculate
how much it is all worth, as it if were owned by a company, we come up
with a huge amount of wealth accumulated over centuries by this slow
growth. In 1998 dollars, the global infrastructure is worth approximately
4 quadrillion dollars. That's a 4 with 15 zeros. That's a lot of pennies
from nothing.

What is the origin of this wealth? Ten thousand years ago there was
almost none. Now there is 4 quadrillion dollars worth. Where did all
of it come from? And how? The expenditure of energy needed to cre-
ate this fluorescence is not sufficient to explain it since animals expend
vast quantities of energy without the same result. Something else is at
work. "Humans on average build a bit more than they destroy, and cre-
ate a bit more than they use up," writes economist Julian Simon. That's
about right, but what enables humans, on average, to ratchet up such
significant accumulations?

The ratchet is the Great Asymmetry, says evolutionist Steven Jay
Gould. This is the remarkable ability of evolution to create a bit more, on
average, than it destroys. Against the great drain of entropy, life ratchets
up irreversible gains. The Great Asymmetry is rooted in webs, in tightly
interlinked entities, in self-reinforcing feedback, in coevolution, and in
the many loops of increasing returns that fill an ecosystem. Because
every new species in life cocreates a niche for yet other new species to
occupy, because every additional organism presents a chance for other
organisms to live upon it, the cumulative total multiplies up faster than
the inputs add up; thus the perennial one-way surplus of opportuni-
ties.

We call the Great Asymmetry in human affairs "the economy." It too

142 / New Rules for the New Economy

is packed with networks of webs that multiply outputs faster than inputs.
Therefore, on average, it fills up faster than it leaks. Over the long run,
this slight bias in favor of creation can yield a world worth 4 quadrillion
dollars.

It is not money the Great Asymmetry accrues, nor energy, nor stuff.
The origin of economic wealth begins in opportunities.

The first object made by human hands opened an opportunity for
someone else to imagine alternative uses or alternative designs for that
object. If those new designs or variations were manifested, then these
objects would create further opportunities for new uses and designs.
One actualized artifact yielded two or more opportunities for improve-
ment. Two improvements yielded two new opportunities each — now
there were four possibilities. Four yielded eight. Thus over time the
number of opportunities were compounded. Like the doubling of the

Both life and wealth expand by
compounding increase, which
gives them an eternal slight
advantage over death and
loss, so that over time there is
constant growth.

lily leaf, one tiny bloom can expand to cover the earth in relatively few
generations.

Perhaps the most potent physical force on earth is the power of com-
pounded results, whether that is compounded interest, compounded
growth, compounded life, or compounded opportunities. The inputs of
energy and human time into the economy can only be supplied in an
additive function, bit by bit, but over time the output is multiplied to
compound upon itself, yielding astounding accumulations.

A steady stream of human attention and thought is applied to in-
venting new tools, devising new amusements, and creating new wants.

Opportunities Before Efficiencies / 143

But no matter how small and inconsequential, each innovation is a
platform for yet other innovations to launch from.

It is this expanding space of opportunities that creates an ongoing
economy. It is this boundless open-ended arena for innovations that
spurs wealth creation. Like a chain reaction, one well-placed innovation
can trigger dozens, if not hundreds, of innovation offspring down the
line.

Consider, for example, email. Email is a recent invention that has
ignited a frenzy of innovation and opportunity. Each tiny bit of email
ingenuity begets several other bits of ingenuity, and they each in turn
beget others, and so on compoundfinitum. Unlike a piece of junk mail,
an email advertisement costs exactly the same to send to one per-
son or one million people — assuming you have a million addresses.
Where does one get a million addresses? People innocently post their
addresses all over the net — at the bottom of their home page, or in a
posting on a news group, or in a link off an article. These postings sug-
gested an open opportunity to programmers. One of them came up
with the idea of a scavenger bot. (A bot, short for robot, is a small bit of
code.) A scavenger bot roams the net looking for any phrase contain-
ing the email @ sign, assumes it is an address, pockets it, and then
compiles lists of these addresses that are sold for $20 per thousand
to spammers — the folks who mail unsolicited ads (junk mail) to huge
numbers of recipients.

The birth of scavenger bots suddenly created niches for anti-spam
bots. Companies that sell internet access seed the net with decoy phony
email addresses so that when the addresses are picked up by scavenger
bots and used by the spammers, the internet provider will get mail they

Each new invention creates a
space from which several more
inventions can be created.
And from each of those new
innovations comes yet more
spaces of opportunity.

144 / New Rules for the New Economy

can track to find out where the spam is coming from. Then the provider
blocks the spam from that source for all their customers, which keeps
everyone happy and loyal.

Naturally, that innovation creates opportunity for yet more innova-
tion. Creative spammers devised technology that allows them to fake
their source address; they hijack someone else's legitimate address to
mail spam from and then flee after using it.

Every move generates two countermoves. Every innovation creates
an opportunity for two other innovations to succeed by it.

Every opportunity seized launches at least two new opportunities.

The entire web is an opportunity dynamo. More than 320 million
web pages have been created in the first five years of the web's exis-
tence. Each day 1.5 million new pages of all types are added. The num-
ber of web sites — now at 1 million — is doubling every 8 months. (Think
lily pond!) A single opportunity seized in 1989 by a bored researcher
began this entrepreneurial bloom. It is not the lily leaf that is expanding
now, but the lily pond itself.

The number of opportunities, like the number of ideas, are limitless.
Both are created combinatorially in the way words are. You can com-
bine and recombine the same 26 letters to write an infinite number of
books. The more components you begin with, the faster the total pos-
sible combinations ramp up to astronomical numbers. Paul Romer, an
economist working on the nature of economic growth, points out that
the number of possible arrangements of bits on a CD is about io'- ) '"' on .
Each arrangement would be a unique piece of software or music. But
this number is so huge there aren't enough atoms in the universe to
physically make that many CDs, even subtracting all the duds that are
just random noise.

We can rearrange more than just bits. Think of the mineral iron ox-
ide, suggests Romer. It's rust. More than 10,000 years ago our ances-
tors used iron oxide as a pigment to make art on cave walls. Now, by
rearranging those same atoms into a precisely thin iron oxide film on
plastic we get a floppy disk, which can hold a reproduction of the same
cave paintings, and all the possible permutations of it wrought by Pho-
toshop. We have amplified the possibilities a millionfold.

Opportunities Before Efficiencies / 145

The power of combinatorial explosions — which is what you get with
ideas and opportunities — means, says Romer, "There's essentially no
scarcity to deal with." Because the more you use opportunities, the less
scarce they get.

Everything we know about the structure of the network economy
suggests that it will bolster this efflorescence of opportunities, for the
following reasons:

■ Every opportunity inhabits a connection. As we connect up more
and more of the world into nodes on a network, we make available bil-
lions more components in the great combinatorial game. The number
of possibilities explodes.

■ Networks speed the transmission of opportunities seized and in-
novations created, which are disseminated to all parts of the network
and the planet, inviting more opportunities to build upon them.

Technology is no panacea. It will never solve the ills or injustices of
society. Technology can do only one thing for us — but it is an astonish-
ing thing: Technology brings us an increase in opportunities.

Long before Beethoven sat before a piano, someone with twice his
musical talents was born into a world that lacked keyboards or orches-
tras. We'll never hear his music because technology and knowledge had
not yet uncovered those opportunities. Centuries later the fulfilled oppor-
tunity of musical technology gave Beethoven the opportunity to be great.
How fortunate we are that oil paints had been invented by the time Van
Gogh was ready, or that George Lucas could use film and computers.
Somewhere on Earth today are young geniuses waiting for a technology
that will perfectly match their gifts. If we are lucky, they'll live long enough
for our knowledge and technology to make the opportunity they need.

Oil paint, keyboard, opera, pen — all these opportunities remain. But
in addition we have added film, metal work, skyscrapers, hypertext, and
holograms as but a few of the new opportunities for artistic expression.
Each year we add more opportunities of every stripe. Ways to see. Meth-
ods for thinking. Means of amusing. Paths to health. Routes to under-
standing.

The Great Asymmetry of economic life ceaselessly amasses new
opportunities while relinquishing few old ones. The one-way journey is

146 / New Rules for the New Economy

toward more and more possibilities, pointing in more and more direc-
tions, opening more and more new territories.

"A few decades from now there will be ten billion people on
the planet, and sophisticated computers will be cheaper than transis-
tor radios," writes science fiction writer David Brin in his manifesto
The Transparent Society. "If this combination does not lead to war and
chaos, then it will surely result in a world where countless men and
women swarm the dataways in search of something special to do —
some pursuit outside the normal range, to make each one feel just a
little bit extraordinary. Through the internet, we may be seeing the start
of a great exploration aimed outward in every conceivable direction of
interest or curiosity. An expedition to the limits of what we are, and
what we might become."

As the transmission of knowledge accelerates, as more possibili-
ties are manufactured, the unabated push of incremental growth also
speeds up. In the long run, creating and seizing opportunities is what
drives the economy. A better benchmark than productivity would be to
measure the number of possibilities generated by a company or innova-
tion and use the total to evaluate progress.

In the short run, though, problems must be solved. Businesses are
taught that they are in the business of solving problems. Put your finger
on a customer's dissatisfaction, the MBAs say, and then deliver a solu-
tion. This bit of hoary advice inspires business to seek out problems.
Problems, however, are entities that don't work. They are usually situ-
ations where the goal is clear but the execution falls short. As in, "We
have a reliability problem," or "Customers complain about out late de-
livery." In the words of Peter Drucker, "Don't solve problems." George
Gilder distills the essence further: "When you are solving problems, you
are feeding your failures, starving your successes, and achieving costly
mediocrity. In a competitive global arena, costly mediocrity goes out of
business."

"Don't solve problems; pursue opportunities."

Seeking opportunities is no longer wisdom relevant only to the long
cycles of economic progress. As the economy speeds up, so that an
"internet year" seems to pass in one month, the principles of long-

Opportunities Before Efficiencies / 147

term growth begin to govern the day-to-day economy. The dynamics of
growth become the dynamics of short-term competitive advantage.

In both the short and long term, our ability to solve social and eco-
nomic problems will be limited primarily to our lack of imagination in
seizing opportunities, rather than trying to optimize solutions.

There is more to be gained by producing more opportunities than by
optimizing existing ones.

Optimization and efficiency die hard. In the past, better tools made
our work more efficient. So economists reasonably expected that the
coming information age would be awash in superior productivity. That's
what better tools gave us in the past. But, surprisingly, the technology
of computers and networks have not yet led to measurable increases in
productivity.

Increasing efficiency brought us our modern economy. By produc-
ing more output per labor input, we had more goods at cheaper prices.
That raised living standards. The productivity factor is so fundamental
to economic growth that it became the central economic measurement
tracked and perfected by governments. As economist Paul Krugman
once said, "Productivity isn't everything, but in the long run it is almost
everything."

Productivity, however, is exactly the wrong thing to care about in the
new economy.

To measure efficiency you need a uniform output. But uniform out-
put is becoming rarer in an economy that emphasizes smaller produc-
tion runs, total customization, personalized "feelgoods" and creative
innovation. Less and less is uniform.

And machines have taken over the uniform. They love tedious and
measurable work. Constant upgrades enable them to churn out more
per hour. So the only ones who should worry about their own productiv-
ity are those made of ball bearings and rubber hoses. And, in fact, the
one area of the current economy that does show a rise in productiv-
ity has been the U.S. and Japanese manufacturing sectors, which have
seen an approximately 3% to 5% annual increase throughout the 1980s

148 / New Rules for the New Economy

and into the 1990s. This is exactly where you want to find productivity.
Each worker, by the supervising machinery and tools, produces more
rivets, more batteries, more shoes, and more items per person-hour.
Efficiencies are for robots.

Opportunities, on the other hand, are for humans. Opportunities de-
mand flexibility, exploration, guesswork, curiosity, and many other qualities
humans excel at. By its recursive nature, a network breeds opportunities,
and incidentally, jobs for humans.

Where humans are most actively engaged with their imaginations,
we don't see productivity gains — and why would we? Is a Hollywood
movie company that produces longer movies per dollar more produc-
tive than one that produces shorter movies? Yet an increasingly greater
percentage of work takes place in the information, entertainment, and
communication industries where the "volume" of output is somewhat
meaningless.

The problem with trying to measure productivity is that it measures
only how well people can do the wrong jobs. Any job that can be mea-
sured for productivity probably should be eliminated from the list of
jobs that people do.

The task for each worker in the industrial age was to discover how
to do his job better: that's productivity. Frederick Taylor revolutionized
industry by using his scientific method to optimize mechanical work.
But in the network economy, where machines do most of the inhumane
work of manufacturing, the question for each worker is not "How do I
do this job right?" but "What is the right job to do?"

Answering this question is, of course, extremely hard to do. It's
called an executive function. In the past, only the top 10% of the work-
force was expected to make such decisions. Now, everyone, not just
executives, must decide what is the right next thing to do.

In the coming era, doing the exactly right next thing is far more fruit-
ful than doing the same thing better.

But how can one easily measure this vital sense of exploration and
discovery? It will be invisible if you measure productivity. But in the ab-

Opportunities Before Efficiencies / 149

sence of alternative measures, productivity has become a bugaboo. It
continues to obsess economists because there is little else they know
how to measure consistently.

As bureaucrats continue to measure productivity, they find no sub-
stantial increase in recent decades. This despite $700 billion invested
into computer technology worldwide each year. Millions of people and
companies worldwide purchase computer technology because it in-
creases the quality of their work, but in the aggregate there is no record
of their benefits in the traditional measurements. This unexpected find-
ing is called the productivity paradox. As Nobel laureate Robert Solow
once quipped, "Computers can be found everywhere except in economic
statistics."

There is no doubt that many past purchases of computer systems
were bungled, mismanaged, and squandered. Lastyear8,ooo mainframe
computers — computers with the power of a Unix box and the price of a
large building — were sold to customers imprisoned by legacy systems.
IBM alone sold $5 billion worth of mainframes in 1997. Those billions
don't help the efficiency ratings. The year 2000 fiasco is a world-scale
screwup that also saps the payoff from information technology. But ac-
cording to economic historian Paul David, it took the smokestack econ-
omy 40 years to figure out how to reconfigure their factories to take
advantage of the electric motor, invented in 1881; for the first decade
of the changeover productivity actually decreased. David likes to quip
that "In 1900 contemporaries might well have said that the electric dy-
namos were to be seen 'everywhere but in the economic statistics.' "
And the switch to electric motors was simple compared to the changes
required by network technology.

At this point we are still in just the third decade of the age of the
microprocessor. Productivity will rebound. In a few years it will "sud-
denly" show up in elevated percentages. But contrary to Krugman's
assertion, in the long run productivity is almost nothing. Not because
productivity increases won't happen; they will. But because, like the
universal learning curve that brings costs plunging down, increased
productivity is a rote process.

The learning curve of inverted prices was first observed by T. P.
Wright, a legendary engineer who built airplanes after the First World
War. Wright kept records of the numbers of hours it took to assemble

150 / New Rules for the New Economy

each plane and calculated that the time dropped as the total number of
units completed increased. The more experience assemblers had, the
greater their productivity. At first this was thought to be relevant only to
airplanes, but in the 1970s engineers at Texas Instruments began apply-
ing the rule to semiconductors. Since then the increase of productivity
with experience is seen everywhere. According to Michael Rothschild,
author of Bionomics, "Data proving learning-curve cost declines have
been published for steel, soft contact lenses, life insurance policies, au-
tomobiles, jet engine maintenance, bottle caps, refrigerators, gasoline
refining, room air conditioners, TV picture tubes, aluminum, optical
fibers, vacuum cleaners, motorcycles, steam turbine generators, ethyl
alcohol, beer, facial tissues, transistors, disposable diapers, gas ranges,
float glass, long distance telephone calls, knit fabric lawn mowers, air
travel, crude oil production, typesetting, factory maintenance, and hy-
droelectric power."

As the law of increasing productivity per experience was seen to be
universal, another key observation was made: The learning didn't have
to take place within one company. The experience curve could be seen
across whole industries. Easy, constant communication spreads experi-
ence throughout a network, enabling everyone's production to contrib-
ute to the learning. Rather than have five companies each producing
10,000 units, network technologies allow the five to be virtually grouped
so that in effect there is one company producing 50,000 units, and every-
one shares the benefits of experience. Since there is a 20% drop in cost
for every doubling of experience, this network effect adds up. Advances
in network communications, standard protocols for the transmission
of technical data, and the informal, ad hoc communities of technicians
all spread this whirlwind of experience, and ensures the routine rise of
productivity.

Analyst Andrew Kessler of Velocity Capital Management compares
the plummeting of prices due to the universal learning curve to a low
pressure front in the economy. Just as a meterological low pressure sys-
tem sucks in weather from the rest of the country, the low pressure
point generated by sinking prices sucks in investments and entrepre-
neurial zeal to create opportunities.

Opportunities and productivity work hand in hand much like the
two-step process of variation and death in natural selection. The pri-

Opportunities Before Efficiencies / 151

mary role that productivity plays in the network economy is to disperse
technologies. A technical advance cannot leverage future opportunities
if it is hoarded by a few. Increased productivity lowers the cost of acqui-
sition of knowledge, techniques, or artifacts, allowing more people to
have them. When transistors were expensive they were rare, and thus
the opportunities built upon them were rare. As the productivity curve
kicked in, transistors eventually became so cheap and omnipresent that
anyone could explore their opportunities. When ball bearings were dear,
opportunities sired by them were dear. As communication becomes
everywhere dirt cheap and ubiquitous, the opportunities it kindles will
likewise become unlimited.

The network economy is destined to be a fount of routine produc-
tivity. Technical experience can be shared quickly, increasing efficiencies
in automation. The routine productivity of machines, however, is not
what humans want. Instead, what the network economy demands from
us is something that looks suspiciously like waste.

Wasting time and inefficiencies are the way to discovery. When
Conde Nast's editorial director Alexander Liberman was challenged on
his inefficiencies in producing world-class magazines such The New
Yorker, Vanity Fair, and Architectural Digest, he said it best: "I believe
in waste. Waste is very important in creativity." Science fiction ace Wil-
liam Gibson declared the web to be the world's largest waste of time.
But this inefficiency was, Gibson further noted, its main attraction and
blessing, too. It was the source of art, new models, new ideas, subcul-
tures, and a lot more. In a network economy, innovations must first be
seeded into the inefficiencies of gift economy to later sprout in efficien-
cies of the commerce.

Before the World Wide Web there was Dialog. Dialog was pretty fu-
turistic. In the 1970s and '80s it was the closest thing to an electronic
library there was, containing the world's scientific, scholarly, and jour-
nalistic texts. The only problem was its price, $1 per minute. You could
spend a lot of money looking things up. At those prices only serious
questions were asked. There was no fooling around, no making frivo-
lous queries — like looking up your name. Waste was discouraged. Since
searching was sold as a scarcity, there was little way to master the me-
dium, or to create anything novel.

It takes 56 hours of wasting time on the web — clicking aimlessly

152 / New Rules for the New Economy

through dumb web sites, trying stuff, and making tons of mistakes and
silly requests — before you master its search process. The web encour-
ages inefficiency. It is all about creating opportunities and ignoring
problems. Therefore it has hatched more originality in a few weeks than
the efficiency-oriented Dialog system has in its lifetime, that is, if Dialog
has ever hatched anything novel at all.

The Web is being run by 20-year-olds because they can afford to
waste the 56 hours it takes to become proficient explorers. While 45-
year-old boomers can't take a vacation without thinking how they'll jus-
tify the trip as being productive in some sense, the young can follow
hunches and create seemingly mindless novelties on the web without
worrying about whether they are being efficient. Out of these inefficient
tinkerings will come the future.

Faster than the economy can produce what we want, we are explor-
ing in every direction, following every idle curiosity, and inventing more
wants to satisfy. Like everything else in a network, our wants are com-
pounding exponentially.

Although at some fundamental level our wants connect to our
psyches, and each desire can be traced to some primeval urge, technol-
ogy creates ever new opportunities for those desires to find outlets and
form. Some deep-rooted human desires found expression only when
the right technology came along. Think of the ancient urge to fly, for
instance.

KLM, the official Dutch airline, sells a million dollars worth of tickets
per year to people who fly trips to nowhere. Customers board the plane
on whatever international flight KLM has extra seats on, and make an
immediate round-trip flight, returning without leaving the airport at the
other end. The flight is like a high-tech cruise, where duty-free shopping
and simply flying in a 737 at a steep discount is the attraction. Where
did this want come from? It was created by technology.

Finance writer Paul Pilzer notes perceptively that "When a merchant
sells a consumer a new Sony Walkman for $50, he is in fact creating
far more demand than he is satisfying — in this case a continuing and
potentially unlimited need for tape cassettes and batteries." Technology
creates our needs faster than it satisfies them.

Needs are neither fixed nor absolute. Instead they are fluid and re-
flexive. The father of virtual reality, Jaron Lanier, claims that his passion

Opportunities Before Efficiencies / 153

for inventing VR systems came from a long-frustrated urge to play "air
guitar" — to be able to wave his arms and have music emanate from his
motions. Anyone with access to a VR arcade can now have that urge
satisfied, but it is a want that most people would have never recognized
until they immersed themselves into virtual reality gear. It was certainly
not a primary want that Plato would have listed.

At one time a useful distinction was made in economics between
"primary" needs such as food and clothing, and all other wants and
preferences, which were termed "luxuries." Advertising is undoubtedly
guilty, as critics charge, of creating desires. At first these manufactured
desires were for luxuries. But the reach of technology is deep. Sophisti-
cated media technology first creates desires for luxuries; then technol-
ogy transforms those luxuries into primary necessities.

A dry room with running water, electric lights, a color TV, and a toilet
are considered so elementary and primary today that we outfit jail cells
with this minimum technology. Yet three generations ago, this technol-
ogy would have been officially classified as outright luxurious, if not friv-
olous. In the government's eyes 93% of Americans officially classified
as living in poverty have a color TV, and 60% have a VCR and a micro-
wave. Poverty is not what it used to be. Technological knowledge con-
stantly ups the ante. Most Americans today would find living without
a refrigerator and telephone to be primitive, indeed. These items were
luxuries only 60 years ago. At this point an automobile of one's own is
considered a primary survival need of any adult.

"Need" is a loaded word. The key point in economic terms is that
each actualization of a desire — that is, new each service or product —
forms a platform from which other possible activities can be imagined
and desired. Once technology satisfies the opportunity to fly, for in-
stance, flying produces new desires: to eat while flying, to fly by oneself
to work each day, to fly faster than sound, to fly to the moon, to watch
TV while flying. Once technology satisfies the desire to watch TV while
flying, our insatiable imagination hungers to be able to watch a video of
our own choosing, and to not see what others watch. That dream, too,
can be actualized by technical knowledge. Each actualization of an idea
supplies room for more technology, and each new technology supplies
room for more ideas. They feed on each other, rounding faster and
faster.

154 / New Rules for the New Economy

This ever-extending loop whereby technology generates demand,
and then supplies the technology to meet those demands is the origin
of progress. But it is only now being viewed as such. In classical eco-
nomics — based on the workings of the brick and smokestack — tech-
nology was a leftover. To explain economic growth, economists tallied
up the effects of the traditional economic ingredients such as labor,
capital, and inventory. This aggregate became the equation of growth.
Whatever growth was not explained by those was attributed to a resid-
ual category: technology. Technology was thus defined as outside the
economic engine. It was also assumed to be a fixed quantity — some-
thing that didn't really change itself. Then in 1957 Robert Solow, an
economist working at MIT, calculated that technology is responsible for
about 80% of growth.

We see now, particularly with the advent of the network economy,
that technology is not the residual, but the dynamo. In the new order,
technology is the Prime Mover.

Our minds will at first be bound by old rules of economic growth
and productivity. Listening to the technology can loose them. Technol-
ogy says, rank opportunities before efficiencies. For any individual, or-
ganization, or country the key decision is not how to raise productivity
by doing the same better, but how to negotiate among the explosion of
opportunities, and choose right things to do.

The wonderful news about the network economy is that it plays right
into human strengths. Repetition, sequels, copies, and automation all
tend toward the free and efficient, while the innovative, original, and
imaginative — none of which results in efficiency — soar in value.

Strategies

Why can't a machine do this? If there is pressure to increase the pro-
ductivity of human workers, the serious question to ask is, why can't a
machine do this? The fact that a task is routine enough to be measured
suggests that it is routine enough to go to the robots. In my opinion,
many of the jobs that are being fought over by unions today are jobs
that will be outlawed within several generations as inhumane.

Scout for upside surprises. The qualities needed to succeed in the

Opportunities Before Efficiencies / 155

network economy can be reduced to this: a facility for charging into the
unknown. Disaster lurks everywhere, but so do unexpected bonanzas.
But the Great Asymmetry ensures that the upside potential outweighs
the downside, even though nine out often tries will fail. Upside benefits
tend to cluster. When there are two, there will be more. A typical upside
surprise is an innovation that satisfies three wants at once, and gener-
ates five new ones, too.

Maximize the opportunity cascade. One opportunity triggers an-
other. And then another. That's a rifle-shot opportunity burst. But if one
opportunity triggers ten others and those ten others after, it's an explo-
sion that cascades wide and fast. Some seized opportunities burst com-
pletely laterally, multiplying to the hundreds of thousands in the first
generation — and then dry up immediately. Think of the pet rock. Sure,
it sold in the millions, but then what? There was no opportunity cas-
cade. The way to determine the likelihood of a cascade is to explore the
question: How many other technologies or businesses can be started
by others based on this opportunity?

^Tj^^usand Points of

The network economy will unleash opportunities on a scale never seen
before on Earth. But the network economy is not Utopia. It is a unique
phase of economic development much like adolescence — a thrilling,
disorienting, and never-to-be repeated time. The planet can progress
only once through the stage when it is first completely wrapped by net-
works of thought and interaction. We are now at that moment when
a cloak of glass fibers and a halo of satellites are closing themselves
around the globe to bring forth a seamless economic culture.

This new global economic culture is characterized by decentralized
ownership and equity, by pools of knowledge instead of pools of capital,
by an emphasis on an open society, and, most important, by a wide-
spread reliance on economic values as the basis for making decisions
in all walks of life.

The sources of capital, which in the industrial age were once consol-
idated in a few banks and individual "capitalists," are now fragmenting
into millions of networked bank accounts, mutual funds, and private
investments throughout society. Elite, centralized banks used to have
a monopoly on capital — the engine of capitalism. Bankers loaned their
assets as debt, and from this debt, industry rose. But with increased
knowledge and communication, investors realized that partnerships —
or investments where the investor shares risk — yield significantly more
wealth in the long run. Technology has accelerated the migration from
making loans to making investments. The ease of computerized ac-
counting allows almost anyone with as little as $100 to plug into the
network of equity. Despite the rise of a few gigantic global banks, in-

A Thousand Points of Wealth / 157

creasing amounts of the wealth are now held in equity, and not in debt.
Today, for instance, 28% of U.S. household assets are kept in equities —
more than is kept in banks — and 44% of U.S. households own stock.

Networks promote this equity culture. The ownership of organi-
zations is distributed and decentralized into a thousand points. The
trans-actional costs of owning a tiny share of someone's else's dreams
and ambitions continues to drop so that it becomes feasible to pos-
sess, directly and indirectly, small parts of many companies. When you
invest in a mutual fund, you invest in hundreds of thousands of other
people's work. You use the wealth that your own ambition has gener-
ated to seed the generation of prosperity by others. You may own only
some minuscule portion of an enterprise, but you can easily own parts
of many firms, and each firm is owned by millions of individuals. This is
network equity.

Out of this distributed ownership a portrait of a network emerges.
Millions of lines of investment crisscross the landscape. Afew individu-
als own a lot, but the majority of nodes are dispersed into small bank
accounts in small towns. The bulk of stocks in the United States are
controlled by the pension funds of ordinary citizens — by millions of indi-
viduals in the aggregate. The workers of America really do collectively
own the means of production.

This network equity is made possible by the same network technol-
ogy — shrinking chips and expanding communications — that creates
wealth in the first place. The tracking, accounting, and transmission of
each person's wealth and slivers of ownership can happen only because
computation and telecommunication have reduced the cost of a trans-
action to insignificance, Today there are 7,000 mutual funds — 7,000
ways to divvy up the equity of wealth creation. And there are a similar
number of publicly traded companies that have, in effect, divvied up
their wealth to many owners.

There are several trends in this emerging equity culture, each one
amplified by pervasive network technology.

First, the spread of ownership is becoming global, just as the econ-
omy itself is. In the last few years, Europe has suddenly sent a mind-bog-
gling infusion of money into the stock markets. Europeans discovered
equity culture and overnight invested hundreds of billions of dollars
of their old wealth into the network of ownership. At the same time,

158 / New Rules for the New Economy

hungry investors are pouring billions into the coffers of Asian and Latin
American "emerging markets." Today, almost any investor in mutual
funds, whether he knows it or not, has a stake in a company operating
in a nation outside his own.

Second, as the ease and price of transactions drop, the spread of
ownership becomes fine-grained and ever wider. Smaller and smaller
investments into more and more varieties of endeavors are possible.
Several banks are following the lead of the Grameen Bank of Ban-
gladesh and offering microloans. These loans amount to U.S. $100
or less, and are made to third-worlders who use the money to buy a
cow, purchase some yarn, or begin some other microentrepreneurial
dream. The payback rate is around 95%, making these almost as risk-
free as bonds. As one banking report says, "Lending to poor people in
the shanty towns of La Paz may be safer for banks than lending to the
government of Bolivia itself." Large commercial banks have noticed the
U.S. $7 billion already lent to 13 million people around the world, and
are bringing "microfinance" into the mainstream of banking. The low
cost of tracking large numbers of fast-circulating payments means that
network technology can accelerate the velocity of money in such decen-
tralized, microfinance programs. It is easy to imagine a high-yielding
mutual fund based on hundreds of thousand of up-and-coming third
world microentrepreneurs.

Third, the same type of fine-grained decentralization is about to
happen in publicly traded companies. During the 1990s approximately
4,000 companies "went public" in the United States. These corpora-
tions were newly funded by the investment of many small shareholders,
who collectively contributed about $250 billion to these companies' eq-
uity. Right now, very old-fashioned hurdles prevent many smaller com-
panies from accepting equity investments by the public. Some of these
hurdles are legacies from the industrial era when communication and
information were scarce. Some obstacles are simply the selfish protec-
tions of investment bankers and others who reap billions by their mo-
nopoly on controlling the process of taking a company public. Network
technology is radically altering the stock market, causing a widespread
reevaluation of the role and worth of stock brokers, traders, and a cen-
tralized market itself (such as the New York Stock Exchange) in a world

A Thousand Points of Wealth / 159

where economic information is ubiquitious and instant. Secure, reli-
able, and trustworthy offerings of publicly traded companies can hap-
pen on the net without most of the traditional Wall Street rigmarole.
Network technology will make it possible for qualified companies to
take their company public from a desktop, directly soliciting the invest-
ments from billions of individuals and organizations worldwide. This
will happen sooner than Wall Street thinks.

Fourth, the Silicon Valley model of compensation is infecting more
parts of the world. A major element of equity culture is the ideology
that every person working in a company should have the opportunity to
own part of it. In most American high-tech companies, stock options
for employees are mandatory. Shares in the company are often used to
recruit hot talent, or to be dispensed as bonuses, or, in the case of start-
ups, to be paid out as a substitute for a salary. Companies that grant
stock options to all employees return greater wealth to shareholders
than companies that don't (19% for the former, 11% for the latter).

In the network economy, ownership is fragmented into myriad parts,
sped along electronic pathways, and dispersed among workers, ven-
ture capitalists, investors, alliance members, outsiders, and, in minute
doses, even to competitors. Networks breed swarm capitalism.

Yet as networks rise, the center recedes. It is no coincidence that
global networks appear at the same time as the postmodern literary
movement. In postmodernism, there is no central authority, no univer-
sal dogma, no foundational ethic. The theme of postmodernism in the
arts, science, and politics is summed up by Steven Best and Douglas
Kellner in their book The Postmodern Turn: "The postmodern turn re-
sults in fragmentation, instability, indeterminacy, and uncertainty." This
also sums up the net.

Network principles renounce rigidity, closed structure, universal
schemes, central authority, and fixed values. Instead networks offer up
plurality, differences, ambiguity, incompleteness, contingency, and mul-
tiplicity. These qualities are ideal for disruption, for the spread of net-
worked-organized crime, and for fostering the lack of shared values.

Because the nature of the network economy seeds disequilibrium,
fragmentation, uncertainty, churn, and relativism, the anchors of mean-
ing and value are in short supply. We are simply unable to deal with

160 / New Rules for the New Economy

questions that cannot be answered by means of technology. The stereo-
typical modern consumer is already a rather thin character. He or she is
like a balloon: possessing an inflated ego and a thin identity stretched
to its limit. They don't know who they are, but they are very certain that
they are very important. The smallest prick can pop their container.

In the great vacuum of meaning, in the silence of unspoken values,
in the vacancy of something large to stand for, something bigger than
oneself, technology — for better or worse — will shape our society.

Because values and meaning are scarce today, technology will make
our decisions for us. We'll listen to technology because our modern
ears listen to little else. In the absence of other firm beliefs, we'll let
technology steer. No other force is as powerful in shaping our destiny.
By imagining what technology wants, we can imagine the course of our
culture.

The future of technology is networks. Networks large, wide, deep,
and fast. Electrified networks of all types will cover our planet and their
complex nodes will shape our economy and color our lives. The shift to
this new perspective will be neither immediate nor painless. Nor will it
be as strange as it first appears.

There is no reason to accept the imperative of technology without
challenge, but there is also no doubt that technology's march is clearly
aimed toward all things networked. Those who obey the logic of the net,
and who understand that we are entering into a realm with new rules,
will have a keen advantage in the new economy.

ULES FOR THE NEW

1) Embrace the Swarm. As power flows away from the center, the
competitive advantage belongs to those who learn how to embrace de-
centralized points of control.

2) Increasing Returns. As the number of connections between
people and things add up, the consequences of those connections
multiply out even faster, so that initial successes aren't self-limiting, but
self-feeding.

3) Plentitude, Not Scarcity. As manufacturing techniques perfect
the art of making copies plentiful, value is carried by abundance, rather
than scarcity, inverting traditional business propositions.

4) Follow the Free. As resource scarcity gives way to abundance,
generosity begets wealth. Following the free rehearses the inevitable fall
of prices, and takes advantage of the only true scarcity: human atten-
tion.

5) Feed the Web First. As networks entangle all commerce, a firm's
primary focus shifts from maximizing the firm's value to maximizing
the network's value. Unless the net survives, the firm perishes.

6) Let Co at the Top. As innovation accelerates, abandoning the
highly successful in order to escape from its eventual obsolescence be-
comes the most difficult and yet most essential task.

7) From Places to Spaces. As physical proximity (place) is replaced
by multiple interactions with anything, anytime, anywhere (space), the
opportunities for intermediaries, middlemen, and mid-size niches ex-
pand greatly.

8) No Harmony, All Flux. As turbulence and instability become the
norm in business, the most effective survival stance is a constant but
highly selective disruption that we call innovation.

9) Relationship Tech. As the soft trumps the hard, the most pow-
erful technologies are those that enhance, amplify, extend, augment,
distill, recall, expand, and develop soft relationships of all types.

10) Opportunities Before Efficiencies. As fortunes are made
by training machines to be ever more efficient, there is yet far greater
wealth to be had by unleashing the inefficient discovery and creation of

new opportunities.

ACKNOWLEDGMENTS

This book benefited greatly from the work of researcher Jan Tudor, of JT
Research in Portland, Oregon. Many people, including a number of qual-
ified economists, supplied me with very helpful comments after reading
the article upon which this book is based. These readers included Paul
Romer, Paul Krugman, and George Gilder. Romer, Krugman, John Ha-
gel, Paul Saffo, and Michael Kremer also provided interviews to me as
well. A few other people took valuable time to read and comment on the
manuscript version: John Heileman of The New Yorker, Russ Mitchell of
U.S. News a[ World Report, Peter Schwartz of Global Business Network,
and Hal Varian of the University of California, Berkeley. The fact-checking
crew at Wired magazine made significant contributions, and as usual,
saved me from embarrassment. At Viking, editor David Stanford turned
my rough draft into a smooth piece of English while copy editor Danny
Marcus further polished it to its present form. Many of the concepts
expanded here originated in long conversations with John Perry Barlow,
who was often the first to appreciate their power. John Brockman, my
literary agent, saw a book in my ideas. My wife, Gia-Miin Fuh, sacrificed
her weekends so I could write it; without that gift, this book wouldn't
have happened. Thank you, all.

NOTES

4 In DeLong's view: DeLong's essay
"Old Ideas for the New Economy," in
Rewired, www.rewired.com.
8 "Listen to the technology": Quoted by
George Gilder in the Gilder Technology
Report, November 1996.
10 a transistor cost: "Happy 50th" by
Heidi Elliott, in Electronic Business, De-
cember 1997.

10 trillion objects manufactured:

Estimated by multiplying the estimated
average number of objects one person
buys in a year by the number of adults.
10 200 million computers: DataQuest.
10 number of noncomputer chips: Data-
Quest.

14 Tree of Life: http://phylogeny.arizona.
edu/tree/phylogeny.html.

15 CM saves $1.5 million: "What Com-
plexity Theory Can Teach Business" by
David Berreby, in Strategy s[ Business Is-
sue 3, 1996.

16 a computer flight simulator: This
audience participation technology is
operated by Cinematrix Interactive En-
tertainment Systems, Novato, CA, (415)
892-8254, or cies@nbn.com.

28 " If a product": "Increasing Returns
and the New World of Business," by
W. Brian Arthur, in Harvard Business Re-
view, July 1996.

31 "Technology is the campfire":

"Change is Good," Wired, January 1998.
36 "the only reliable predictor": "Chaos
in Hollywood" by John Cassidy, in The
New Yorker, March 31, 1997.
49 Gilder's Law: "Fiber Keeps Its Prom-
ise," by George Gilder, in Forbes ASAP,
April 1997.

52 "in the Network Economy": "Enter-
tainment Values: Will Capitalism Go
Hollywood?" by Paul Krugman, in Slate,
January 22, 1998.

55 "What information consumes": "The

Information Economy" by Hal Varian,
Scientific American, September 1995.
56 first 1,000 days of the web's life:
Brewster Kahle's internet backup site
www.archive.org.

59 "The creator who": "Intellectual
Value" by Esther Dyson, in Wired, July
1995.

63 "A web limits risk": "Spider versus
Spider" by John Hagel III, in McKinsey
Quarterly, 1966 No. 1.

63 "Players compete not by locking in":
"Increasing Returns and the New World
of Business," by W. Brian Arthur, in Har-
vard Business Review, July 1996.

64 in the 1890s, electricity: "Computer
and Dynamo" by Paul David, in Technol-
ogy and Productivity, OECD, 1991.

68 "Law is becoming irrelevant":
Quoted by David Brin in The Transparent
Society, Addison-Wesley, 1998.

69 boasted of an estimated 120 million:
Nua Ltd., May 1998.

69 If current rates continue: Interna-
tional Telecommunications Union 1998
Report.

71 $212 billion on information: Informa-
tion Technology Industry Council.

72 Rocky Mountain Institute: Home
page at www.rmi.org.

72 electronics in a car: "Ubiquitous
Computing" by Sean Baenen at Global
Business Network.

75 "The time may come": Pop Interna-
tionalism, by Paul Krugman, MIT Press,
1996.

80 "Firms are remarkably creative":

Mastering the Dynamics of Innovation, by
James M. Utterback, Harvard Business
School Press, 1994.
83 "Successful firms often": "Recent
Evolutionary Theorizing About Economic
Change," by Richard Nelson, in Journal
of Economic Literature, March 1995.

1 66 / Notes

85 David Ackley: "Interactions Between
Learning and Evolution" by David H.
Ackley and M. L. Littman, in Artificial
Life II, edited by C. C. Langton, Addison-
Wesley, 1992.

104 the half-life of Texan businesses:

"A Nanaoeconomic Perspective on the
Growth and Development of the Texas
Manufacturing Base, 1970-1991," by
Donald Hicks, in A Report Prepared for
the Office of the Comptroller, State of
Texas.

104 the European Union: "A Second
American Century" by Mortimer B. Zuck-
erman, in Foreign Affairs, May/June 1998.
106 "You're pitchforking a bunch of
freelancers": Bruce Sterling's speech at
the 1998 Computers Freedom and Pri-
vacy Conference in Austin, Texas.
106 entertainment complex: "Why Every
Business Will Be Like Show Business,"
by Joel Kotkin and David Friedman, in
Inc, March 1995.

110 "the Mecca of the economist":

Quoted by Richard Nelson, in "Recent
Evolutionary Theorizing About Economic
Change," by Richard Nelson, in Journal
of Economic Literature, March 1995.
118 an emerging standard called P3P:
Maintained by Firefly, www.firefly.net.
122 sites such as junglee or Jango: www.
junglee.com, www.jango.com.
125 "the new economy begins": "What's
So New about the New Economy?" by
Alan Weber, in Harvard Business Review,
January/February 1993.
127 "Whatever the Government": "The
Telephone Transformed — Into Almost
Everything," by James Gleick, in

The New York Times Magazine, May 16,
1993.

128 protocols such as Truste: www.
truste.org.

134 4 quadrillion dollars: This rough
guesstimate was extrapolated from the
annual growth in the world's GDP. Since
the economy grows about 1% annually,
and that growth is 4 billion, the full size
of the world's economy is close to a hun-
dred times bigger, or 4 quadrillion.
134 "Humans on average": The Ultimate
Resource, by Julian Simon, Princeton Uni-
versity Press, 1996.

137 More than 320 million web pages:

Brewster Kahle's internet backup at
www.archive.org.

139 "Productivity isn't everything": The

Age of Diminishing Expectations, by Paul
Krugman, MIT Press, 1994.

140 a rise in productivity: The Rise of
the Network Society, by Manuel Castells,
Blackwell Publishers, 1996.

141 IBM alone sold: "Mainframe Busi-
ness, Though Faded, Is Still Far from Ex-
tinct" by Lawrence Fisher, The New York
Times, May 18, 1998.

144 "When a merchant sells a con-
sumer": Unlimited Wealth, by Paul Zane
Pilzer, Crown Publishers, 1990.

145 93% of Americans officially classi-
fied: Quoting Federal Reserve Bank of
Dallas economist Michael Cox, in an
interview in "Wealth If You Want It," by
Kevin Kelly, Wired, November 1996.
148-49 28% of U.S. households: "A Sec-
ond American Century," by Mortimer B.
Zuckerman, in Foreign Affairs, May/June
1998.

150 "Lending to poor people": "Credit
where credit is due: Bringing
microfinance into the mainstream," by
Peter Montagnon, Center for the Study
of Financial Innovation, February
1998.

ANNOTATED BIBLIOGRAPHY

The following books are ranked by relevance and degree of insight to under-
standing the new economy. This list starts with those I found most pertinent
and ends with those that served as background. Left unlisted are many good
books on economics and new business that contained only a few relevant
ideas to this subject. Some of these additional resources are mentioned in
my source notes. Following the annotated books is a list of useful web sites
which have the best and most current material.

Information Rules: A Strategic Guide to the Network Economy, by Carl
Shapiro and Hal R. Varian. Harvard Business School Press, 1998. If you want
to go beyond the fundamental principles outlined in my book, try this one.
This book is the best overview of the network economy yet, rigorously writ-
ten by two bona fide economists, with careful analysis and plenty of real-life
examples. Their emphasis is on high-tech and online environments, but their
understanding is on target and widely applicable. Five stars.

Enterprise One to One: Tools for Competing in the Interactive Age,
by Don Peppers and Martha Rogers. Doubleday, 1997. An excellent investiga-
tion into the future shape of relationships in the new economy. I learned all
kinds of unexpected things from this well-written and witty book. It is very
pragmatic about business tactics (how to get your company to interact with
customers), but it also articulates useful economy principles at the strategic
level as well. The authors seem to have an intuitive grasp of how the new
economy is unfolding.

Net Cain: Expanding Markets Through Virtual Communities, by John
Hagel III and Arthur G. Armstrong. Harvard Business School Press, 7997.
A highly original and extremely insightful view of the new economy seen
through the lens of commercial communities. It shifts focus away from firms
or customers and onto emerging networks. It sees virtual communities as
serious business. Although not economic in its sensibilities, this is one of the
best books about the network economy. Highly recommended.

The Rise of the Network Society, by Manuel Castells. Volume 1 of the Infor-
mation Age. Blackwell Publishers, 1996. A dense, sprawling, comprehensive
vista of the ongoing transformation of society by network technologies. Cas-
tells is a sociologist with a European's bent for the large-scale sweep of his-

1 68 / Annotated Bibliography

tory. This book, the first in a trilogy, is a catalog of evidence for the arrival of
a new global, networked-based culture. The immense scope of this change is
reflected in the immense, and at times unwieldy, scope of this book. Castells'
literate and broad view is what makes it worthwhile.

Blur: The Speed of Change in the Connected Economy, by Stan Davis and
Christopher Meyer. Addison-Wesley, 1998. Further explorations of the conse-
quences of the network economy. The authors list three primary forces over-
turning the old order: speed, intangibles, and connectivity (which parallel my
three of globalization, intangibles, and connectivity). They have lots of busi-
ness examples and yet more strategies.

Unleashing the Killer App: Digital Strategies for Market Dominance, by
Larry Downes and Chunka Mui. Harvard Business School Press, 7998. Despite
the slightly misleading title, this book celebrates the network economy. It ar-
rives at similar conclusion as I do, and it even has its own list of new rules
(on page 77). However, its focus is on the practical creation of a business
service or product in the new economy. It is not as methodical or complete as
Information Rules, but I think it is a good general businessperson's introduc-
tion.

Webonomics, by Evan I. Schwartz. Broadway Books, 7997. Schwartz fo-
cuses very specifically on the practical problems of using web sites to create
commerce. His nine principles for doing business on the web won't hold true
for the entire new economy, but they are pointed in the right direction. If you
are running a commercial web site, his advice is certainly helpful.

The Digital Estate: Strategies for Competing, Surviving, and Thriving in
an Internetworked World, by Chuck Martin. McGraw-Hill, 7996. A super book
for getting a feel for the new online business culture. Martin gives you a vis-
ceral sense of the tremendous cleverness, brilliant innovations, and experi-
mental business models happening "out of sight" on the web. He's a great
tour guide to this strange new territory, and the best way to get a sense of
"what's happening" in online commerce.

The Economics of Electronic Commerce, by Andrew B. Whinston, Dale O.
Stahl, and Soon-Yong Choi. Macmillan Technical Publishing, 7997. Electronic
commerce is barely born and already has its textbook. This one is a pretty
good textbook, too. The material is wonderfully interdisciplinary, covering
economics, engineering, finance, and marketing. In addition to the usual pa-
pers and book references, the authors also list plenty of relevant web site
urls. For doing business online, this textbook is better than having an MBA.

The Digital Economy: Promise and Peril in the Age of Networked Intel-
ligence, by Don Tapscott. McGraw-Hill, 7996. In a not very organized fashion,
this book wanders through some of the emerging dynamics of the network
economy. There are lots of examples of new economy business, but with little
theory, and a minimum of analysis. Overall, he is good at picking out new

Annotated Bibliography / 169

economy business trends.

Electronic Commerce: A Manager's Guide, by Ravi Kalakota and Andrew
B. Whinston. Addison-Wesley, 7997. One of those books that are very timely at
the moment, but will date quickly. Here is everything known in 1997 about
managing electronic commerce on a web site. How to do firewalls, transac-
tion security, and electronic payments from the view of a nonprogramming
mid-level manager. If the authors are smart, they'll keep this tome updated.

The Weightless World: Strategies for Managing the Digital Economy, by
Diane Coyle. Capstone Publishing, 7997. This book, unlike many of the others
listed here, is more concerned with the economic consequences, rather than
the business implications, of the new economy. Coyle begins to grapple with
the issues such as welfare, governance, and policy decisions which a "weight-
less" world of information will demand. Another way of saying this is that
Coyle often considers the downsides of the new economy. Such questioning
is sorely needed.

Release 2.0: A Design for Living in the Digital Age, by Esther Dyson. Broad-
way Books, 1997. A pretty good primer aimed at lay people explaining the
social consequences of network society and culture. Covers a full range of
topics from privacy to identity to communities and intellectual property. Sort
of like a orientation tour of this exotic tomorrowland.

The Age of the Network: Organizing Principles for the 21st Century, by
Jessica Lipnack and Jeffrey Stamps. Oliver Wright Publications, 1994. Despite its
very new-agey tone, this book is useful as a background. It combines the un-
derstanding of everyday social networks with the understanding of electronic
networks to provide some key insights into how human networks in general
work. And it makes clear their increasing influence.

Bionomics: Economy as Ecosystem, by Michael Rothschild. Henry Holt and
Company, 7990. A chatty amplification of a very fundamental metaphor — the
economy behaves like a ecosystem. Buried in the stories about trilobites and
bacteria, are some very keen insights about the network economy.

The Death of Competition: Leadership and Strategy in the Age of Busi-
ness Ecosystems, by James F. Moore. HarperCollins, 7996. The closest analogy
to a network is an ecosystem. Moore plumbs the biological metaphor in great
detail and with more success, perhaps, than Bionomics does. I consider these
ideas prime territory still waiting to be exploited. This book is a good start.

The Economy as an Evolving Complex System, edited by Philip W.
Anderson, Kenneth J. Arrow, and David Pines. Addison-Wesley, 7988. The
published proceedings from a landmark workshop on ecological approaches
to deciphering the economy. Very technical and academic, but also very
revolutionary.

Increasing Returns and Path Dependence in the Economy, by W. Brain
Arthur. University of Michigan Press, 1994. If you are willing to try unprocessed

170 / Annotated Bibliography

originals, the papers in this collection can illuminate the key and pivotal
function of increasing returns. Written by the economist who coined the term,
at least some of the papers are accessible and clear to lay readers.

The Winner-Take-All Society, by Robert H. Frank and Philip J. Cook. Pen-
guin Books, 7995. Since there is a winner-take-most element to the network
economy, this readable book-length essay is quite provocative.

Internet Economics, edited by Lee W. McKnight and Joseph P. Bailey. MIT
Press, 1997. A well-chosen selection of scholarly papers outlining the economic
problems created by internet commerce. Most questions in the compendium
deal with the baffling problem of how to price services in a distributed envi-
ronment. How should shared connections, or insurance, or occasional links
be priced? How should traffic be regulated? What shape will money take?
This is the engineer's approach to economics.

The Death of Distance: How the Communications Revolution Will Change
Our Lives, by Frances Cairncross. Harvard Business School Press, 1997. An accu-
rate book, but with the thin and well-worn announcement that global com-
munications are changing the world. Low on surprises or insight, but full of
facts.

The Self-Organizing Economy, by Paul Krugman. Blackwell Publishers,
7996. A slim volume of fairly technical descriptions of how decentralized,
bottom-up self-organization can shape some economic phenomenon, such
as cities.

The Future of Money in the Information Age, edited by James A. Dorn. Cato
Institute, 7997. Money, which is a type of information, is changing as fast as
the economy it circulates in. This is an academic view of how money and fi-
nancial institutions are transforming.

Digital Money: The New Era of Internet Commerce, by Daniel Lynch and
Leslie Lundquist. John Wiley e( Sons, 7996. Lynch, a founder of a digital cash
system, paints a portrait of the new economy as viewed from the perspective
of liquid, intangible e-money. The shape of money in the future is a huge, vi-
tal, and unknown question, one that I skirted for space reasons. This book is
a great place to catch up.

Cybercorp: The New Business Revolution, by James Martin. Amacon,
7996. Martin is a legendary telecom guru who has written over a hundred
books. This one is a jumble of buzz words, astounding insights, tired cliches,
astute musings, interesting graphs, corny lessons, wonderful statistics, lame
explanations, and bubbly enthusiasm. He's often right, and he is focused on
the new economy, but the reader will have to do the winnowing.

The Twilight of Sovereignty, by Walter B. Wriston. Charles Scribner's Sons,
7992. Not as revolutionary as it was when it was first published in 1992, this
short book still makes a very intelligible case for a new economy birthing.
Wriston pays particular attention to the geopolitical impacts of a networked

Annotated Bibliography / 171

information economy.

Shared Minds: New Technologies of Collaboration, by Michael Schrage.
Random House, 7990. Although not explicitly about networks or network
technology, this book is about what happens when you use tools — such as
networks — to create collaborations of minds, for both work and play. It is
more about the future of business organization than most books advertised
as such.

Regional Advantage: Culture and Competition in Silicon Valley and Route
128, by Annalee Saxenian. Harvard University Press, 1994. A wonderful book
about the success of network culture in Silicon Valley, brought into relief by
comparing it to the older, but less successful and less networked, high-tech
culture based in the vicinity of Boston.

Innovation Explosion, by James Brian Quinn, Jordan J. Baruch, and Karen
Anne Zien. The Free Press, 1997. If knowledge is the new capital, then innova-
tion is the new currency. Quinn and colleagues do a masterful job of plac-
ing innovation as the central dynamic in a knowledge economy. They have
rounded up anecdotes, statistics, and bullet points galore to create a believ-
able case for why innovation is the key variable in the network economy.

Post-Capitalistic Society, by Peter Drucker. HarperCollins, 7993. An early
picture of the coming new economy which has not aged a bit. Drucker is
always worth reading.

Unlimited Wealth: The Theory and Practice of Economic Alchemy, by Paul
Zane Pilzer. Crown Publishers, 1990. This one is an outlier, a little on the ex-
treme side. More than most observers, Pilzer is not hesitant to speculate on
the ways in which technology increases prosperity in an economy. His hereti-
cal ideas are refreshing.

The Third Wave, by Alvin Toffler. Bantam, 79S0. A classic, and yet still
incredibly up-to-date and informative. Toffler's 20-year-old profile of a new
economy and new culture is more readable and more accurate than most
depictions written since.

New Ideas from Dead Economists: An Introduction to Modern Economic
Thought, by Todd C. Buchholz. Penguin Books, 7990. Most "new" ideas in eco-
nomics, as in everything else, are not new at all. This compact volume is the
best one-stop shop for extracting the best thoughts of previous economists.
Painless and edifying, this text should be in every network economist's li-
brary.

The Information Economy, http://www.sims.berkeley.edu/resources/
infoecon/ The most complete web site for the new economy. This clear, wide-
ranging, and very up-to-date site, run by economist Hal Varian, coauthor of
Information Rules (see above), lists papers, works in process, and hundreds
of links to other new economy sites. Almost any web site that is remotely
connected to the information or network economy is linked here, including,

172 / Annotated Bibliography

for example, the follow two sites.

George Gilder's Telecosm Index. http://homepage.seasMpenn.edu/~gaji/
ggindex.html Chapters of author George Gilder's epic book-in-progress on the
emerging telecommunications universe are archived here. Gilder's thinking
is seminal, and many of my own rules owe much to him. Keep an eye out for
his book Telecosm, due out in late 1998; until then, these articles from Forbes
are a real goldmine.

The Economics of Networks, http://rawen.stern.nyu.edu/networks/site.html
This site is primarily dedicated to examining the economic implications of
communication networks. It is crammed with papers by the site organizer
(economist Nicholas Economides), but also includes a very handy bibliogra-
phy and master list of all other economists working on the economics of net-
works.

INDEX

Page numbers in italics refer to charts and figures.

Ackely, David, 89-90
advertising, 102, 152-53
agriculture, 6-7, 8, 79
airplanes, airline industry, 14, 125, 149,
152

allegiance, 28, 65-66, 132

Amazon.com, 127

America Online (AOL), 49, 64, 121

Anderson, Laurie, 33

antitrust hearings, 27

Apache, 6l, 64

Apple Computer, 29, 41, 82, 110
architecture, 81

Arthur, Brian, 25, 27, 29, 66-67, no
ATMs, 41-42, 98, 120
atoms, 9, 75
attention, scarcity of, 59
automobiles, automobile industry, 3, 4,
50, 54, 69, 92-93, 96, 122

dumb chips in, 11, 12

economies of scale in, 26

hypercars, 76

lightweight, 73, 73, 75-76

painting of, 15

bandwidth, 52, 118-19
banks, banking, 98, 156, 158
ATMs and, 41-42, 98, 120
Barbie dolls, customized, 122
Barnes and Noble, 127
barter, 7

Beethoven, Ludwig van, 145
Berkeley Mac User Croup, 131
Best, Steven, 159
Best Bananas, 97-98
Betamax, 29

biological models, 31, 32-33, 83-85
Bionomics (Rothschild), 149-50
biotechnology, 88
Bloomberg terminals, 41
books, 126-27

Bose-Einstein distribution, 38
brain, human, 13
Brand, Stewart, 60, 61
Bressand, Albert, 124-25
Brin, David, 131, 145-46
Browning, John, 24

Built to Last (Collins and Porras), 116-17
bullet trains, 16

cameras, digital, 37
capital, sources of, 156
Carpenter, Loren, 17-18
carpets, value of, 40
cassette tapes, 44
CD-ROMs, 91
CDs, 144

music, 67, 98-99
cellular neurons, 6, 13
cellular phones, 44, 58
cement business, 14-15
Cemex (Cementos Mexicanos), 14-15
Cendant, 63
change, 108-9, 114-16

of customer preferences, 123, 128-30
chaos vs. order, 113-14, 173
Chemical Bank, 42
Cisco, 27
Citibank, 41-42
closed (proprietary) systems:

avoiding of, 48-49

opening up, 39, 41-42
CNN, 107

collaborative filtering, 128
Collins, James, 116-17
commodities, flow of, 48
Commodore 64, 45

communication, l, 4, 5-6, 33, 52, 150-51
real-time, 12, 15, 21
in spaces, 95-96, 95
see also email; internet;

telecommunications; telephones

174 / Index

community, 104-6, 104
Compaq, 133
competition, 26, 70

increasing returns and, 27, 29
compounded results, 142, 144
computer chips, n, it, 51

as "enabling technology," 5
computers, 3, 5, n, 13, 14, 37, 67

conferencing systems for, 70-71

disappearance of, 19-20

mainframe, 149

productivity and, 148-49

user groups for, 130-31

see also email; internet; World Wide
Web

connections, 12-22

customer-to-customer, 138

exponential growth and, 23-25

opportunities and, 145

plentitude and, 46

relationships and, 137, 138-39

swarm technology and, 13-18, 21-22
Connection Test, 137
contracts, 120
copies, 40-41, 54
creative destruction, 86
C2Net, 64
culture:

equity, 156-59

technology as, 33-35
customer preferences, 122-30

anticipation of, 123, 125-28

changing of, 123, 128-30

creating of, 122, 123

remembering of, 122, 123-24
customers, 27, 118-39

as employees, 120, 121, 139

fanatical, 131-32

learning and, 129

as prosumers, 121-24

smart, 62, 130-31, 130, 138

wisdom of, 132-34
customization, 121-23
Cygnus Solutions, 64

Darwin, Charles, 140, 141
David, Paul, 149

decentralization, 9-22, 158-59, 161

strategies for, 19-22

swarm technology and, 13-18, 21-22
decision making, 70, 81

decreasing returns, law of, 25
DeLong, Brad, 4

demand, demand curves, 55-56, 55, 153
De Vany, Art, 38
devolution, 83-93,

avoiding shortsightedness and, 87-89,
91-92, 92

being in charge of, 93

in better companies, 86-87

start-ups and, 89-90

strategies for, 91-93
Dialog, 151
Direct-TV, 58

disease, tipping point of, 34
disequilibrium (flux), 108-17, 709, 159,
161

innovation and, 112-14
stagnation and death vs., 110-12
strategies for, 116-17

disintermediation, 98-99

Disney, 88

dolls, customized, 122
dominance, 27, 34, 43
Doom, 48
DOS, 41, 130
Downes, Larry, 74
Drucker, Peter, 72, 146
Drucker's Rule, 37
Drudge, Matt, 98
dumb chips, see "jelly beans"
DVD video standard, 67
Dvorak keyboard, 29
Dyson, Esther, 63

economic growth, 140-41, 146, 147,
153-54

economic sectors, "enabling," 5

economies of scale, 26, 28

economy, U.S.:

intangible trade in, 3-4
manufacturing in, 7-8, 26, 147
waxing and waning of sectors in, 4

efficiency, 147, 149

800 numbers, 120

electricity, 68, 69, 149, 153

ElectronicCast, 13

email, 16, 42, 43, 45, 100, 119, 128, 143
embedded phase, 67, 68-69, 80-81
e-money, 68, 105

employment, employees, 7-8, 78-79,
101, 109-10, 709

Index / 175

customers vs., 120, 121, 139
"enabling technologies," 5
Encyclopaedia Britannica, 60, 91
Enterprise One to One (Peppers and

Rogers), 124
entertainment, 3, 4, ill

see also books; movies; music;
television
equity culture, 156-59
Ethernet, 24
E-trade, 138
Eudora, 57

European Union, 109-10

evangelists, 81-82

evolution, 89-90, 140, 141

executive function, 148

expectations, 31-32

experience curve, 150

exponential growth, 23-25, 30-31,30,

36.43
externalities, 26-27, 36

Fairchild Semiconductor, 53
farming, 6-7, 8, 79
Fast Company (Weber), 132
fax effect, 39, 44

fax machines, faxes, 27, 30, 31, 39-40,
40, 41,44

Federal Aviation Administration (FAA), 14
Federal Express (FedEx), 10, 30, 30, 31,

33-34
feedback loops, 51

creation of, 36-37

positive, 26, 29

self-negating, 36

self-reinforcing, 36-37, 141
feeding the web first, see prosperity
finance, 5-6, 156
Firefly, 125-27, 132-33
firms:

customer's relationship with, 119-20,
122-30, 134-39

devolution of, see devolution

prosperity and, 65-69

size of, 101-3, 707

see also specific firms
flight simulation, 17
floppy disks, 144
fluid phase, 67, 68-69
flux, see disequilibrium
Ford, Henry, 26

"free flight," 14

ftp capability, 42

Future Shock (Toffler), 121, 132

Cage, John, 6i

General Motors (CM), 3, 15, 101
generosity, 50-64, 161

anticipating cheapness and, 53, 64

sharing and, 60-62

strategies for, 62-64

supply and demand and, 55-56, 55

value and, 57-60
Gibson, William, 151
GIF images, 41
Gilder, George, 52, 146
Gilder's Law, 52, 54
Gleick, James, 134
globalism, 2, 74, 119, 156-59
Gould, Steven Jay, 141
Grameen Bank, 158
Great Asymmetry, 141-42, 145, 154
Grove, Andy, n
Gutenberg, Johann, 40

Hagel, John, 31, 66, 129

hand-made items, 78

Hicks, Donald, 109

hierarchies, 119

hobby tribes, 105-6, 131-32

Hollywood movie industry, in, 148

Home Motor, 19

home-shopping networks, 34-35

Houston, Tex., swarm technology in, 16

HTML, 71

Hyde, Lewis, 60

hypercars, 76

IBM, 89, 107, 149
identity, 65, 126-27, 133
immune system, 13
Inc., 109, in

increasing returns, law of, 25-30, 25, 36,

80, 90, 105
incubations, long, protection of, 37
indexes, 59
individualism, 102-3
industrial economy, 19, 25, 45, 50, 78, 79,
83, 84, 102, 108

economies of scale in, 26, 28

expectations in, 31-32

undoing of, 112-14

176 / Index

information (knowledge), 2, 3, 4, 51, 56,
76-79, 105, 119, 156
distribution of, 20-21
material , 73-76, 73
peers and, 119-20, 128-32
prosperity and, 73-79, 73
symmetry of, 134-37
innovation, 27-28, 31-32, 46, 80, 90-91,
93

disequilibrium and, 112-14
momentum vs. significance of, 35
opportunities and, 142-44, 743
skunk works mode and, 89-90
intangibles:

as characteristic of new economy, 2-5
copies of, 40-41

see also information; relationships

Intel, 67

interfection, 80

intermediaries, 96-102, 99
nodes as, 100-102

internet, 13, 16, 18, 33-34, 42, 60, 146
economy of, 76-77
exponential growth of, 30, 31
service providers for, 36-37
see also email; World Wide Web

internet protocols (IP), 80-81

inventory, 12

investment, 156-59

Iran, Shah of, 44

iron oxide, 144

ITU (International Telecom Union), 72

Japan, 75, 147

swarm technology in, 16

Tamagotchis in, 32
Java, 57, 58

"jelly beans" (dumb-chips), 10-22, 31
computer chips compared to, n, 11
swarm technology and, 13-18, 21-22

Keely, Larry, 14
Kellner, Douglas, 159
Kessler, Andrew, 150
keyboards, 29
Khomeini, Ayatollah, 44
KLM, 152
Kmart, 85

knowledge, see information
Kotkin, Joel, m

Krugman, Paul, 55-56, 78-79, 147, 149

Lanier, Jaron, 137, 152
leadership, 17-18
learning curve, 51, 53, 149-50
Lessig, Lawrence, 71
Liberman, Alexander, 151
Linux, 6i

Lovins, Amory, 76
loyalty, 28, 65-66, 132
Lucas, George, 145
Luddites, 8

McDonald's, 61
manufacturing, 26, 147, 148

employment in, 7-8
Marshall, Alfred, 115
Marx, Karl, 115
mass customization, 121-23
Mastering the Dynamics of Innovation

(Utterback), 85
MCI, 13

Mead, Carver, 8

Mercedes-Benz, 12

mess media, 106

Metcalfe, Bob, 24

Metcalfe's law, 24, 30

Mexico, cement business in, 14-15

microloans, 158

Microsoft, 4, 6, 27, 31, 33-34, 91, 101, 125

profits of, 30, 30, 33
Microsoft Internet Explorer, 57
Microsoft Network (MSN), 49
Milgrom, Paul, 87
modems, high-speed, 36-37
monopolies, 27-28
"monovation," 27
Moore, Cordon, 52, 63-64
Moore's Law, 52
movies, 37-38, in, 126-27, 148
MPEG standard, 81
Mui, Chunka, 74
music, 145

CDs, 67, 98-99
mutual funds, 156, 157-58
My Launch, 125

National Semiconductor, 10
needs vs. wants, 152-53
Negroponte, Nicholas, 73, 76, 93
Nelson, Richard, 88
net, as symbol for future, 9
Net Cain (Hagel), 31, 129

Index / 177

Netscape, 57, 58
NetWare, 64

network externalities, 26-27, 36

networks, network economy:

conversation compared to, 133-37
decentralization and, 9-22, 11
defined, 31

exponential growth of, 23-25, 30-31, 30

hierarchies vs., 119

maximizing of value of, 67-69

as meta-country, 72

opportunities and, 145

phases of, 67-69

as possibility factory, 46-47

smaller, coordination of, 36

workings of, 2-3, 9-12

see also specific topics
new economic order:

characteristics of, 2-8

see also specific topics
New York Times, 134
Nintendo, 85
nodes, 10, 12, 21, 46, 100

animated, 12-13, 20

arithmetic increase of, 23

as intermediaries, 100-102
Novell, 64
Noyce, Robert, 53
nuclear power, 84

oil, oil industry, 37, 75

opportunities, 39, 43-49, 140-55, 161
innovations and, 142-44, 743
interconnectedness and, 45
as origin of wealth, 141-44, 142
of others, maximizing of, 47-48
seeking of, 146

as source of other opportunities,

144-46
strategies for, 154-55
Oracle, 27

order vs. chaos, 113-14, 713
Out of Control (Kelly), 17-18

passport profile, 125
peers, 119-20, 128-32
Pentiums, 45
Peppers, Don, 124
perfection, letting go of, 86-87
Perl, 6i

Peters, Tom, 86, 94

pets, electronic, 32
pharmaceuticals, 48
Pilzer, Paul, 152

plentitude, 39-49, 43, 55, 80, 161
law of, 45-46

opening closed systems and, 39,
41-42

opportunity and, 39, 43-49
strategies for, 47-49
value and, 39-42, 40
Plus, 42

"polyvation," 27-28
Porras, Jerry, 116-17
Porter, Michael, 90
postmodernism, 159
Postmodern Turn, The (Best and Kellner),
159

poverty, the poor, 153, 158
Powerbooks, 45
prestandard phase, 67-68
prices, 27, 29, 64, 77

decline of, 50-53, 56-57, 149-50
privacy, 133-37
problem solving, 146
productivity, 118, 119, 147-52, 154
productivity paradox, 149
proprietary systems, see closed

(proprietary) systems
prosperity (feeding the web first), 65-82,
66, 138, 161

information and, 73-79, 73

strategies for, 79-82

technical standards and, 70-73

value and, 67-69, 79-80
prosumers, 121-24
P3P standard, 125
publicly traded companies, 158-59

Qualcomm, 57
QWERTY keyboard, 29

Radio Shack, 52
railways, 15-16, 68
RCA, 53

Reader's Digest, 59
RealAudio, 41

real-time communications, 12, 15, 21
refrigerators, 51-52, 153
Regional Advantage (Saxenian), 28
relationships, 2, 3, 45-46, 118-39
amplification of, 118-19

178 / Index

customer and firm, 119-20, 122-30,

134-39
relationships (cont.)

peerlike, 119-20, 128-32

as social web, 28

strategies for, 138-39

symmetry of knowledge in, 134-37

trust and, 119, 123, 132-38

value of, 124-25
relationship technology (R-tech), 124-30,

132-33, 135-38, 161
reputation, 119

returns, increasing of, see success, self-
reinforcing
reverse market, 129-30
Ritz-Carlton Hotel, 125
Roberts, John, 87
Rogers, Martha, 124
Romer, Paul, 110, 144
Rothschild, Michael, 149-50
Russia, 116

safety, aircraft, 14
Saffo, Paul, 91, 97
Sanders, Jerry, 53
Saxenian, AnnaLee, 28
scarcity, 39, 40, 49, 59, 78, 144
scavenger bots, 143
Schrage, Michael, 119
Schumpeter, Joseph, 86
Schwartz, Evan, 127
searching, as a way of life, 93
Sears, Roebuck, 19, 85, 98
Sega, 59, 85

semiconductor transistors, 10, 53, 149,
150

service sector, 7

Shared Minds (Schrage), 119

shareware, 6i

shopping, 129

home, 34-35

supermarket, 46
significance, threshold of, 34-35, 34
silicate glass fiber, 9, 20
silicon chips, 9, 20

cost of, 10, 11, 51, 52

as cultural neurons, 6

dumb, see "jelly beans"

size of, 10

see also computer chips
Silicon Valley, 25-26, 28, 74, m, 159

Simon, Herbert, 59

Simon, Julian, 141

skunk works mode, 89-90

Smith, Adam, 115

software, 3, 4, 13, 48, 61-62, 71

Solow, Robert, 149, 153-54

Sony, 85

Sony Betamax, 29
spaces, 94-107, 161

community and, 104-6, 104

economy's shift to, 95-97

intermediaries and, 96-102, 99

middle, 103-4, 70 4

places compared to, 94-96, 95

size and, 102-3

strategies for, 107

taste, 125-26, 126

technical concept of, 96
Sprint, 44

Statistical Abstract, U.S., 31

Sterling, Bruce, in

stock, stock markets, 53, 157-59

subcultures, 126-27, 132

submarine steering simulation, 17-18

success:

basic rules of, 90

questioning of, 93

self-limiting, 25
success, self-reinforcing (increasing
returns), 23-38, 161

biological model of, 31-35

exponential growth and, 23-25

law of increasing returns and, 25-30,
25.36

strategies for, 36-38

threshold of significance and, 34-35, 34

tipping point and, 34-35, 34
Sun, 57, 58

supply curves, 55-56, 55
swarm technology, 13-18, 21-22, 161
aim of, 16

bottom-up vs. top-down control in,
17-18

Tamagotchis, 32
taste space, 125-26, 126
Taylor, Frederick, 148
TCP/IP, 24, 41, 71
technical standards, 70-73
technological revolution, technology, 1,
8, 31-35

Index / 179

biological growth in, 31, 32-33
as culture, 33-35
demise of, 84-85
early vs. quality, 29
"enabling," 5

equity culture and, 156-59
invisible, 19-20

opportunities and, 45, 145, 152-54
protocommercial stage of, 60-62
relationships and, 118-19, 122-30,

132-33, 135-39
size of companies and, 101-2, 101
Supply/Demand Flip and, 55-56, 55
swarm, see swarm technology
values and meaning and, 159-60
worth of, 137
telecommunications, 3, 44, 52, 119, 132
telephones, 27, 34, 43, 54-55, 153
cellular, 44, 58
data vs. voice traffic on, 13
networks of, 24, 26
prestandard phase of, 68
television, 32, 106, 137, 153
cable, 37
direct-, 58
future of, 92

home-shopping networks on, 34-35
Web, 35, 49
Texas, business life span in, 109
Texas Instruments, 149
Thomson, 57
Thurow, Lester, 72
tipping point, 34-35, 34
Toffler, Alvin, 103, 108, 121, 132
Torvalds, Linus, 61
tragedy of the commons, 60-61
Transparent Society, The (Brin),

145-46
transportation, 33, 50, 69

see also airplanes, airline industry;

automobiles; automobile industry;

railways
Tree of Life, 14
trucking, 6, 7
trust, 119, 123, 132-38
Truste, 135-36
TV Guide, 59-60
1211 transistor, 53

Ultima Online, 121-22
Unix, 24, 61, 64, 71

Useem, Jerry, 109

user groups, 130-31

Utterback, James, 85

vacuum tube technology, 84-85

value:

in economies of scale, 26

generosity and, 57-59

increasing returns and, 26-28

maximizing of, 67-69, 79-80

n2, 24, 27, 36

plentitude and, 39-42, 40

of relationships, 124-25

scarcity and, 40

in webs, 97-100
values and meaning, lack of, 159-60
Van Gogh, Vincent, 145
VHS, 29

video, 67, 68, 8i, 99
video games, 45
virtual corporations, 139
virtual reality (VR), 152
voice mail, 119

Walls, David, 38
Wal-Mart, 85
wants vs. needs, 152-53
wealth, 52, 59, 156-60

origin of, 141-44, 142
Weber, Alan, 132, 133
Webonomics (Schwartz), 127
web sites, 93, 132, 144

badges on, 135-36
WebTV, 35, 49
Weiser, Marc, 19
Well, 42, 70-71

"Why Every Business Will Be Like Show

Business" (Kotkin), 111
Windows, 29, 30
Windows NT, 41, 81
Wired, 4, 6, 99
Wired Digital, 99

World Wide Web, 7, 13, 46, 90, 104,
151-52

browsers for, 57, 58

generosity and, 60, 61-62

indexes to, 59
Wright, T. P., 149
Wriston, Walter, 3

X-Windows, 61

youth cultures, 32
zillionics, 46